-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NRZCtOfUD1f/sYFwA1aZ2U76Fp1INwpYiX7KDEaQYb6mNOzxEq8y7k+du3dXAodM NGW+3KX7GNCliKosuFwD5A== 0001012870-02-001606.txt : 20020415 0001012870-02-001606.hdr.sgml : 20020415 ACCESSION NUMBER: 0001012870-02-001606 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHIPPAC INC CENTRAL INDEX KEY: 0001093779 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770463048 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-31173 FILM NUMBER: 02597790 BUSINESS ADDRESS: STREET 1: 3151 CORONADO DR CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4084865900 MAIL ADDRESS: STREET 1: 3151 CORONADO DRIVE CITY: SANTA CLARA STATE: CA ZIP: 95054 10-K 1 d10k.txt FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______________ to _______________. Commission file number 000-31173 ChipPAC, Inc. (Exact Name of Registrant as Specified in Its Charter) Delaware 77-0463048 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 47400 Kato Road, Fremont, California 94538 (Address of Principal Executive Offices, Zip Code) Registrant's telephone number, including area code (510) 979-8000 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered NONE Securities registered pursuant to Section 12(g) of the Act: Class A common stock, $.01 par value Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ___ --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[_] Aggregate market value of voting stock held by non-affiliates of the registrant as of March 13, 2002: $256,905,709 81,031,705 shares of the Registrant's Class A common stock were outstanding on March 13, 2002. No shares of the Registrant's Class B common stock were outstanding on that date. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement related to the 2002 Annual Meeting of Stockholders, to be filed subsequent to the date hereof - Part III. ================================================================================ TABLE OF CONTENTS
PAGE ---- PART I ......................................................................... 3 Item 1. BUSINESS ........................................................... 3 Item 2. PROPERTIES ......................................................... 14 Item 3. LEGAL PROCEEDINGS .................................................. 15 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................ 15 PART II ........................................................................ 16 Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ................................................ 16 Item 6. SELECTED FINANCIAL DATA ............................................ 17 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .......................................... 18 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ............................................................... 30 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ........................ 32 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ........................................... 77 PART III ....................................................................... 77 Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ................. 77 Item 11. EXECUTIVE COMPENSATION ............................................. 77 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ......................................................... 77 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ..................... 77 Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ................................................................ 77
2 Part I ITEM 1. BUSINESS DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This annual report on Form 10-K contains forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "target," "anticipates," "believes," "estimates," "predicts," "potential," "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and speak only as of their dates. These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties, including those identified under Exhibit 99.1 of this annual report and other risks and uncertainties indicated from time to time in our filings with the SEC. Actual results could differ materially from these forward-looking statements. In addition, important factors to consider in evaluating these forward-looking statements include changes in external market factors, changes in our business or growth strategy or an inability to execute our strategy due to changes in our industry or the economy generally, the emergence of new or growing competitors and various other competitive factors. In light of these risks and uncertainties, there can be no assurance that the matters referred to in the forward-looking statements contained in this annual report will in fact occur. Industry ChipPAC is one of the world's largest independent providers of semiconductor packaging, test, and distribution services. We offer one of the broadest portfolios of leaded and laminate packages for integrated circuits. We supply packaging solutions to the leading semiconductor companies that service the computing, communications and multi-application end markets. We are a leader in providing high end packaging solutions, including ball grid array packages, or BGA packages, the most advanced type of mass produced package. In addition to providing assembly and test services on a global basis, we are the largest semiconductor packaging and test service provider in mainland China. As consumers demand smaller electronic devices with more functionality, there is a greater requirement for power regulation and generation, which we expect to drive demand for our power packages. We are the leader in high-volume assembly, test and distribution of discrete and analog power packages. We are also one of the leading providers of advanced packaging products that address the needs of semiconductors used in wireless LAN and handset applications, including chip-scale, stacked die and flip-chip technologies. Our online design and characterization process, referred to as SmartDESIGN(TM), is a proprietary web-based design collaboration system that provides a higher rate of product qualification, improved technical performance and shorter time-to-market service for our customers. This system enables us to link to our customers via the Internet to perform package design, electrical, thermal and mechanical analysis and to model end system performance. Outsourcing of packaging and test services to independent packagers like ChipPAC continues to expand due to several factors, including time-to-market pressures, cost reduction, resource allocation, equipment utilization, the increased technological complexity of packaging and the growth of fabless semiconductor manufacturers. Historically, outsourced semiconductor manufacturing services have grown faster than the semiconductor market as a whole. Management believes that the lack of investments in assembly and test capacity by semiconductor manufacturers during the recent downturn in the semiconductor industry will position outsourced providers well to capture enhanced volume levels during the next upturn in the cycle. According to TechSearch International, Inc., outsourcing for high-end package solutions such as BGA and chip-scale packages, or CSP, is forecasted to grow at a compounded annual rate of 11.6% and 12.8%, respectively, from 2000 to 2005. 3 The semiconductor industry has historically experienced volatility, with sharp periodic downturns and slowdowns. These downturns have been characterized by, among other things, diminished product demand, excess production capacity and accelerated erosion of selling prices. The semiconductor industry is presently recovering from a downturn, and we expect conditions to improve in 2002. This downturn has been the worst that the industry has experienced with year over year decline of 32% (according to the Semiconductor Industry Association). Our headquarters are located in Fremont, California and our manufacturing facilities are strategically located in China, Malaysia and South Korea, to address the global needs of our customers. We also have design centers in Arizona and South Korea to provide 24-hour design support to our customers. The packaging and test industry is highly fragmented as we compete against a number of established independent packaging houses as well as the internal capabilities of many of our largest customers. We believe however, that the following business strengths differentiate us from our competitors: . High End Technology Expertise--We are one of the world's largest providers of outsourced BGA packages, which accounted for approximately 46.0% and 55.8% of our packaging revenue for the year ended December 31, 2001 and 2000, respectively. Our BGA packages are used for most high-end applications such as providing non-microprocessor packaging requirements for computing and communications devices, including graphics for nVIDIA Corporation, personal computer chipset for Intel Corporation, Code Division Multiple Access ("CDMA") chipsets for Qualcomm Incorporated and flash for wireless handsets. Our advanced package portfolio also includes next generation flip-chip technology for system on a chip, or SOC, which is used in network servers and telecom switching devices, as well as multi-die packaging for digital signal processors, or DSPs, and other wireless chipsets. In addition, we have critical expertise for testing radio frequency ("RF") devices. We believe that our advanced technology expertise and our commitment to research and development will enable us to continue to drive the development of solutions for next generation semiconductor packages. . Leader in Growing Power/Analog Segment--We are the leader in high-volume semiconductor assembly and test services for discrete, analog, RF and mixed-signal technologies for power products. Power products manage the electricity requirements for multiple components, ensuring an accurate and efficient flow of voltage so electronic devices run longer and more efficiently. Our Malaysian business supports a number of the world's major power and analog semiconductor manufacturers, including Fairchild Semiconductor International, Inc., NEC Corporation, Siliconix Incorporated, STMicroelectronics, Inc. and Vishay Intertechnology, Inc. As electronics become increasingly global, portable, complex and performance-driven, the demand for power regulation increases exponentially. A broad and fast-growing range of end markets, including portable devices, household appliances, automotive systems and telecommunications, will continue to drive power semiconductor usage and the demand for our power products. . Strategic Geographic Diversification--We are strategically located to take advantage of industry outsourcing trends. Cahners In-Stat predicts that within the next ten years, China will be the second largest market in the world for semiconductors. Our Shanghai, China facility, which was established in 1994, is the largest packaging and test provider in China, and we are the first independent provider of chip-scale BGA packages in that country. We provide local content for products sold into the Chinese market, including cellular telephones and portable devices where local content requirements are being driven by the Chinese government. Our high-volume packaging site for advanced BGA packages is in Ichon, South Korea, which is significant for its proximity to semiconductor 4 manufacturers entering the wafer foundry business, large semiconductor customers and an available pool of highly-skilled research and development and technical staff. Our Malaysian facility in Kuala Lumpur positions us to benefit from the growth in fabless manufacturing taking place in Southeast Asia. Our headquarters in Silicon Valley and state-of-the-art research and development facilities in Arizona and South Korea are located near our customers and provide us with the distinct ability to work on a 24-hour-basis with our customers in the design process and in supply chain management. . New and Diversifying Customer Base--We continue to diversify our customer base and end markets. In 2001, we provided services to over 70 customers worldwide. We increased our customer diversification by adding 27 new customers in 2000 and 14 in 2001, including Fairchild, Linfinity Microelectronics, Inc., Siliconix, STMicroelectronics, Texas Instruments Incorporated and Vishay. In particular, we added eight new customers in the power semiconductor segments. Excluding the effect of our largest customer in the computing segment, the total revenue from the rest of our customer base grew at a compound rate of 36.9% from 1999 to 2001. . Long-Term Partnership with Key Customers--We received approximately 65.9% of our revenue for the year ended December 31, 2001 with customers we have long-term agreements with. We believe these agreements provide a competitive advantage during cycles as price incentives and volume terms ensure a leading outsourced position with these customers. We have entered into a supply agreement with Qualcomm under which we will provide packaging and test services for their CDMA chipsets and RF components. We have a supply agreement with Fairchild to supply discrete power products for silicon-based power devices for the computer, communications, industrial, automotive and space and defense end-user markets. We also have an agreement with Intersil Corporation to assemble and test its PRISM(R) wireless LAN chipsets as well as its other analog and mixed signal semiconductors. Lastly, we support LSI Logic Corporation's flip-chip technology through a license and supply agreement. . Among the Leaders in Growing Test Services--Through our long-term partnerships and existing customer base, we are well positioned to capitalize on the rapid growth of outsourced testing by semiconductor producers. This growth in outsourced testing is driven by the increasing demand for mixed-signal and high performance logic devices that require greater capital expenditures on testing equipment. We have made significant capital expenditures on testing equipment that provides us with the capability to test mixed-signal, digital logic, memory, power and RF devices. By increasing our emphasis on our test business and adding capacity, we have significantly increased our test revenue over the last four quarters, and we expect this growth to continue. Our test business revenue grew to $45.5 million in 2001, an increase of $35.0 million from $10.5 million in 1999. Our Services We offer semiconductor packaging and test services to the semiconductor industry, with products and service offerings in communications, computing and multi-applications end markets. Approximately 86.2% and 90.8% of our revenue were derived from packaging services during the years ended December 31, 2001 and 2000 respectively. Approximately 13.8% and 9.2% of our revenue were derived from test services during the years ended December 31, 2001 and 2000, respectively. Since customers require their suppliers to pass a lengthy and rigorous qualification process that can be costly to the customers, we believe they generally do business with a few suppliers. As our services are considered part of the customer's manufacturing infrastructure, we must have dedicated resources and systems to provide flexible manufacturing, quick-turns and real-time information transfers. 5 Packaging We have provided semiconductor packaging and test services since 1984, and offer a broad range of packaging formats for a wide variety of electronics applications. Our two types of packaging services, leaded and substrate, or BGA, contributed approximately 40.2% and 46.0%, respectively, of revenue for the year ended December 31, 2001. Leaded Packaging Leaded packaging is the most widely used packaging type and is used in almost every electronics application, including automobiles, household appliances, desktop and notebook computers and telecommunications. Leaded packages have been in existence since semiconductors were first produced. Leaded devices comprised approximately half of the total industry packaging volume. Leaded packages are characterized by a semiconductor die encapsulated in a plastic mold compound with metal leads surrounding the perimeter of the package. With leaded packages, the die is attached to a leadframe (a flat lattice of leads). The die is then encapsulated in a plastic or ceramic package, with the ends of the leadframe leads protruding from the edges of the package to enable connection to a printed circuit board. This packaging type has evolved from packages designed to be plugged into a printed circuit board by inserting the leads into holes on the printed circuit board to the more modern surface-mount design, in which the leads or pins are soldered to the surface of the printed circuit board. Specific packaging customization and improvements are continually being engineered to improve electrical and thermal performance, shrink package sizes and enable multi-chip capability. We offer a wide range of lead counts and body sizes within this packaging group to satisfy customer die design variations. Our traditional leaded packages are at least three millimeters in thickness and include PDIP, PLCC, and SOIC. Our advanced leaded packages are thinner than our traditional leaded packages, approximately 1.4 millimeters in thickness or less, and have a finer pitch lead spacing, allowing for a higher pin count and greater functionality in a smaller package foot print. Our advanced leaded packages include LFCSP, MQFP, TQFP, iQUAD, TSSOP and SSOP. Our acquisition of the Malaysian business in 2000, added power packages to our portfolio. Power Packaging Power semiconductors are used in a variety of end-markets, including telecommunications and networking systems, computers and computer peripherals, consumer electronics, electronic office equipment, automotive systems and industrial products. These end markets increasingly depend upon power regulation in the trend toward smaller devices and longer operating times. Packaging manufacturers are left to contend with shrinking die geometries owing to continued emphasis upon greater mobility and portability. Power semiconductors typically involve higher current and voltage levels than memory, logic and microprocessor devices. The high current involved with switching on/off high voltages and the phase control of AC signals results in considerable power dissipated internally that produces heat. Thus our power packages are designed in such a way as to conduct the resultant heat away from the die as power is dissipated, preventing the power device from being destroyed. Power package assembly is somewhat different from non-power IC assembly as it often employs special solder alloys requiring different semiconductor bonding machines. Higher current levels of power semiconductors likewise require larger diameter aluminum and gold wire than non-power IC's to carry the load. Our Malaysian facility maintains a vast array of these special machines needed for power semiconductor assembly and test. With a capacity of over 25.0 million units per week, we are the industry leader in power package assembly supporting a number of the world's major power semiconductor manufacturers, including 6 semiconductor manufacturers, including Intersil, Fairchild, NEC, Siliconix, STMicroelectronics and Vishay, whose products are designed into power supplies, battery chargers, ignition modules, voltage regulators, motor controllers and power management devices. BGA Packaging Substrate packaging, or BGA, represents one of the fastest growing areas in the packaging industry and is used primarily in computing platforms, networking, hand held consumer products, wireless communications devices, personal digital assistants, video cameras, home electronic devices such as DVDs and home video game machines. BGA technology was first introduced as a solution to problems associated with the increasingly high lead counts required for advanced semiconductors. As the number of leads surrounding the integrated circuit increased, high lead count packages experienced significant electrical shorting problems. The BGA methodology solved this problem by effectively creating leads on the bottom surface of the package in the form of small bumps or solder balls. In a typical BGA package, the semiconductor die is placed on top of a plastic or tape laminate substrate rather than a leadframe. The die is connected to the circuitry in the substrate by a series of fine gold wires that are bonded to the top of the substrate near its edges. On the bottom of the substrate is a grid of metal balls that connect the packaged device to a printed circuit board. Benefits of BGA packaging over leaded packaging include: . smaller size; . greater pin count, or number of connections to the printed circuit board; . greater reliability; . better electrical signal integrity; and higher power dissipation . easier attachment to a printed circuit board. We supply our customers with substantially the entire family of BGA packaging services offered in the marketplace today, including: . Standard BGA. Standard BGA packaging has a grid array of balls on the underside of the integrated circuit, and is used in high-performance applications, like personal computer chipsets, graphic controllers and DSPs. A standard BGA package generally has greater than 100 pins. Standard BGA packages have better thermal and electrical performance than leaded packages. They also feature more advanced surface mount technology, allowing for easier handling in the packaging process. Standard BGA packaging services accounted for 73.1%, 79.3% of our BGA packaging revenue in the years ended December 31, 2001 and 2000, respectively. . Chip-Scale BGA. Chip-scale BGA packaging includes all packages where the package is less than 1.2 times the size of the silicon die. Chip-scale BGA is a substrate-based package that is designed for memory devices and other medium pin count semiconductors and requires dense ball arrays in very small package sizes, like wireless telephones and personal digital assistants, video cameras, digital cameras and pagers. . System-in-Package (SiP) is family of chip-scale-Packages that contain many (1-4) stacked semiconductor die in one package. This technology allows greater functionality in the same package footprint and thickness without significant cost increase. These packages are used in wireless handsets, consumer products and mobile computing applications. . Flip-chip BGA packaging in which the silicon die is directly attached to the substrate using gold bumps instead of solder balls provides the most dense interconnect at the lowest cost and highest performance. Flip-chip BGA technology is used in a wide array of applications ranging from consumer products to highly sophisticated 7 application specific integrated circuits, referred to as ASIC, computer chipsets, graphics and memory packages. While we believe that flip-chip BGA represents the next generation of BGA packaging technology, we believe that standard BGA and chip-scale BGA packaging will experience long life cycles as have many of our leaded packaging solutions. The following chart summarizes the different types of packaging services we offer and revenue for the year ended December 31, 2001. The full names of each packaging type are provided in the Glossary accompanying our registration statement on Form S-1 (Registration Number 333-39428).
Year Ended Year Ended December 31, 2001 December 31, 2000 - ---------------------------------------------- % of Revenue total Revenue % of Total Package Types Application Pin (In millions) Assembly (In millions) Assembly Count Leaded Revenue Revenue $ 104.9 37.0% $ 132.2 29.4% Traditional: PDIP, PLCC, SOIC, SSOP, Telecommunications, 2 - 84 TSOP, TSSOP, SIP, DPAK, automobiles, household D2PAK, Power, and Hermetic and appliances, and desktop and notebook computers Personal computers $ 27.2 9.6% $ 40.8 9.1% Advanced: MQFP, TQFP, LQFP, and telecommunications 32 - 208 and iQUAD (TM) Laminate $ 110.9 39.2% $ 218.3 48.7% BGA: PBGA, M2BGA (TM) Personal computer 100 - 2000 TBGA, EBGA, and chipsets, Flip PAC (TM) graphic controllers, high-end network servers products, application specific integrated circuits, microprocessors and memory packages. $ 40.2 14.2% $ 57.7 12.8% Chip Scale EconoCSP (TM), M2CSP (TM), Wireless telephones, 6 - 352 Packages Micro BGA (TM), LFCSP, personal (CSP): BCC, and Flip Chip CSP digital assistants, (CSP): video cameras, wireless pagers, and wirelss LAN
8 Test Services We also provide our customers with semiconductor test services for a number of device types, including mixed-signal, digital logic, memory, power and RF devices. Semiconductor testing measures and ensures the performance, functionality and reliability of a packaged device, and requires knowledge of the specific applications and functions of the devices being tested. In order to enable semiconductor companies to improve their time-to-market, streamline their operations and reduce costs, there has been an increasing trend toward outsourcing both packaging and test services. We have capitalized on this trend by enhancing our test service capabilities. Our test revenue was essentially flat in 2001 compared to 2000 in a year where overall sales in the industry were significantly down compared to the prior year. In 2000, we achieved 251% year-over-year growth in test revenue compared to 1999. The acquisition of the Malaysian business expanded our mixed-signal testers and provides us with critical expertise for testing RF devices, one of the fastest growth areas for test outsourcing. We have also noted an increased demand from our customers to provide both assembly and test services on a full turn-key basis. In order to test the capability of a semiconductor device, a semiconductor company will provide us with its proprietary test program and specify the test equipment to run that program. Alternatively, our customers at times may consign their test equipment to us. Our test operators place devices to be tested on a socketed, custom load board and insert the load board into the test equipment which then tests the devices using software programs developed and supplied by our customers. The cost of any specific test and the time, usually measured in seconds, to run a test vary depending on the complexity of the semiconductor device and the customer's test program. In addition to final test services, we also provide "burn in" test services. Through "burn in," a semiconductor is inserted into a socket and subjected to extreme hot and cold temperatures over a period of time. "Burn in" tests are typically conducted to determine overall reliability of a semiconductor under extreme conditions. Other Services We also provide a full range of other value-added services, including: . Design and Characterization Services. We offer design and characterization services at our Chandler, Arizona and Ichon, South Korea facilities. Our design engineers at these facilities select, design and develop the appropriate package, leadframe or substrate for that device by simulating the semiconductor's performance and end-use environment. . Dry Pack Services. In order to prevent the failure of any semiconductors due to exposure to moisture during shipping, we "dry pack" most of our packaged integrated circuits in specially sealed, environmentally secure containers. . Tape and Reel Services. Many electronic assembly lines utilize "tape and reel" methods in which semiconductors are attached to a tape to enable faster attachment to the printed circuit board. We offer a service in which we ship packaged and tested devices on a tape and reel mechanism rather than in a tray, to facilitate the assembly process. . Drop Shipment. In order to enable semiconductor companies to improve their time-to-market and reduce supply chain and handling costs, we offer drop shipment services in which we ship packaged semiconductor devices directly to those companies that purchase devices from our customers. 9 . Wafer Probe. We offer a wafer sort operation where an electrical test is performed on die while still in wafer form. This process establishes which die on each wafer are suitable to be assembled into a final package. Customers In 2001, we provided packaging and test services to over 70 customers worldwide. We increased our customer diversification by adding 16 new customers in 2001 including Fairchild, Linfinity Microelectronics, Siliconix, STMicroelectronics, Texas Instruments and Vishay. Our customers also include Atmel Corporation, International Business Machines Corporation, Intel, Intersil, LSI Logic, nVIDIA, Qualcomm and Samsung Semiconductor. All of these customers are representative of our various services offered. In 2001 and 2000, the Company had four and two customers, respectively, over 10% of sales. These customers were as follows: Year ended December 31, ----------------------- Customer 2001 2000 -------- ---- ---- Intersil 20.2% (less than)10% Intel 18.3% 34.4% LSI Logic 12.8% 12.6% Atmel 10.0% (less than)10% We anticipate that this customer concentration will decrease as we add new customers for which we have already become qualified and customers with which we are undergoing qualification. Our customers are located around the world, but principally in the United States of America, Asia and Europe. The following table details the percentage of total revenue we received from each of these principal geographic locations: Year Ended December 31, ----------- 2001 2000 ---- ---- United States of America ....... 92% 83% Asia ........................... 6 14 Europe ......................... 2 3 --- --- Total ....................... 100% 100% === === In general, our customers principally rely on at least two independent packagers. A packaging company must pass a lengthy and rigorous qualification process that can take a minimum of three months for a typical leaded package and can take more than six months for a typical BGA package and, in each case, can cost the customer approximately $250,000 to $300,000. Once a primary packager has been selected, that packager gains insight into its customer's business operations and an understanding of its products as part of the overall working relationship. These factors, combined with the pressures of a semiconductor company to meet the time-to-market demands of its customers, result in high switching costs for semiconductor companies, making them adverse to changing or adding additional suppliers. We have been successful in attracting new customers because we are one of a few independent packaging and test companies that offers packaging, test and distribution services for a full portfolio of packages. 10 Marketing, Sales and Customer Support We provide sales support to our customers through an international network of offices coordinated from our British Virgin Islands company and located in: . United States of America: . Fremont, California . Chandler, Arizona, . Boston, Massachusetts, . Dallas, Texas, . Palm Bay, Florida, . Kampen, The Netherlands, . Tokyo, Japan, . Shanghai, China, . Ichon, South Korea, . Singapore and . Kuala Lumpur, Malaysia Our account managers, applications engineers, customer service representatives and sales support personnel form teams that focus on a specific customer or geographic region. As is industry practice, we operate with essentially no order backlog due to our quick cycle times. Customers deliver near-term forecasts and release production die to us in daily or weekly increments for packaging, test and distribution. These near-term forecasts guide us as to anticipated volumes, but provide no meaningful backlog statistics. Substantially all of our materials inventory is purchased based on customer forecasts, we carry small quantities of inventory and we have relatively low levels of finished goods inventory. Our marketing efforts focus on creating a brand awareness and familiarity with our advanced device packaging technologies and an understanding of our end-user market applications in wireless handset and PDA graphics, PC chipsets, wireless LAN, memory, storage and networking. We market our leadership in advanced packaging, test technology, and distribution and our ability to supply a broad line of packaging and test services to the semiconductor industry. We target engineers and executive level decision makers through a direct sales force, the delivery of "white papers" at industry conferences, quarterly mailings of technical brochures and newsletters, advertisements in trade journals and our website. Suppliers Our packaging operations depend upon obtaining adequate supplies of materials on a timely basis. The principal materials used in our packaging process are lead frames, rigid and flexible substrates, gold wire and molding compound. We purchase materials based on the demand forecasts of our customers. Our customers are responsible for the costs of any unique materials that we purchase but do not use, particularly those lead frames and substrates that are ordered on the basis of customer-supplied forecasts. We work closely with our primary materials suppliers to insure the timely availability of materials supplies, and we are not dependent on any one supplier for a substantial portion of our materials requirements. We do not see the need for long-term supply contracts and therefore have no significant agreements with materials suppliers. The materials we procure are normally available and we are able to meet our production requirements from multiple sources through periodic negotiation and placement of written purchase orders. We combine our global 11 requirements into centrally negotiated blanket purchase orders to gain economies of scale in procurement and more significant volume discounts. Approximately 82.0% and 65.0% of our substrate costs in the years ended December 31, 2001 and 2000, respectively, were incurred from the purchase of materials from South Korea, with the balance coming primarily from Japan and Taiwan. We expect that in the next several years, an increasing portion of our materials will be supplied from sources in China, Taiwan, and Southeast Asia. Our packaging operations and expansion plans also depend on obtaining adequate quantities of equipment on a timely basis. To that end, we work closely with our major equipment suppliers to insure that equipment deliveries are on time and the equipment meets our stringent performance specifications. Intellectual Property Our ability to develop and provide advanced packaging technologies and designs for our customers depends in part on our proprietary know-how, trade secrets and other non-patented, confidential technologies, which we either own or license from third parties. We have licenses to use numerous third party patents, patent applications and other technology rights, as well as trademark rights, in the operation of our business. Under the patent and technology license agreement that we entered into with Hynix Semiconductor, which we refer to as the Hynix Semiconductor License, we obtained a non-exclusive license to use intellectual property in connection with our packaging activities. Following expiration of its initial term on December 31, 2003, the Hynix Semiconductor License may be extended by us from year to year upon payment of a nominal annual license fee. Hynix Semiconductor may terminate the Hynix Semiconductor License prior to December 31, 2003 if we breach the Hynix Semiconductor License and do not cure that breach within the applicable time period, or in the event of our bankruptcy or similar event, or if a force majeure event prevents performance of the agreement. In August 2001, we entered into a License Agreement with Fujitsu Limited, which we refer to as the Bump Chip Carrier ("BCC") License Agreement, under which we have obtained a non-transferable, non-exclusive and world-wide license, under certain Fujitsu patents and technical information relating to Fujitsu's proprietary BCC technology. The BCC License terminates in August 2006. Subsequent to the five- year term of the license, the agreement shall be extended on an annual basis, unless notification of intent to terminate the agreement is made by either party. We have entered into a License Agreement with Tessera, Inc., which we refer to as the Tessera License, under which we have obtained a worldwide, royalty-bearing, non-exclusive license under specified Tessera patents, technical information and trademarks relating to Tessera's proprietary IC packages, most significantly its mBGA(TM), or micro BGA, packages. The Tessera License will run until the expiration of the last Tessera patent licensed under the Tessera License. Accordingly, the expiration of the Tessera License will not occur until sometime after February 2018, which is the earliest date that all patents licensed under the Tessera License may expire. In connection with our recapitalization in 1999, (see Note 1 to the consolidated financial statements), we obtained a non-exclusive sublicense from Hynix Semiconductor under patents owned by Motorola for use in connection with our BGA packaging process. The initial term of our sublicense under the Motorola patents will expire on December 31, 2002. This sublicense requires Hynix Semiconductor to use commercially reasonable efforts to extend or renew its license from Motorola prior to its expiration on December 31, 2002 and obtain from Motorola the right to grant us a sublicense on the same terms and conditions as those of any extended or renewed license. We have entered into three license agreements with LSI Logic. Under the first license, which we refer to as the LSI flip-chip license, we received a worldwide, non-exclusive, royalty-bearing license to use LSI packaging technology and technical information to manufacture, use and sell flip-chip semiconductor devices having at least 200 solder balls. Our rights under the LSI flip-chip license will become perpetual and irrevocable upon our payment of fees or January 1, 2004, whichever 12 occurs first. LSI Logic may terminate the LSI flip-chip license if, before our rights have become perpetual and irrevocable, we breach the LSI flip-chip license and do not cure that breach within the applicable time period, or in the event of our bankruptcy or similar event. Our second license from LSI Logic, which we refer to as the LSI CSP license, grants us a worldwide, non-exclusive license under LSI packaging technology and technical information to manufacture, use and sell semiconductor device assemblies having an overall height of less than 1.2 millimeter. Our rights under the LSI CSP license are perpetual but LSI Logic may terminate the LSI CSP license if we breach the LSI CSP license and do not cure that breach within the applicable time period, or in the event of our bankruptcy or similar event. Our third license from LSI Logic, which we refer to as the LSI EPBGA license, grants us a worldwide, non-exclusive license under LSI packaging technology and technical information to manufacture, use and sell semiconductor device assemblies having EPBGA (enhanced plastic ball grid array) packaging. Our rights under the LSI EPBGA license are perpetual but LSI Logic may terminate the LSI EPBGA license if we breach the LSI EPBGA license and do not cure that breach within the applicable time period, or in the event of our bankruptcy or similar event. In connection with our acquisition of the Malaysian business, we acquired ownership of all Intersil patents, technical information and copyrights used exclusively in or associated exclusively with the Malaysian business and, additionally, Intersil granted us a worldwide, non-exclusive, royalty-free license under other Intersil patents, copyrights and technical information which are also used in or related to the operation of the Malaysian business. This Intersil license is perpetual and irrevocable. Our primary registered trademark and trade name is "ChipPAC(R)." We own or are licensed to use other secondary trademarks. Research and Development Our research and development efforts are focused on developing new packages, assembly and test technologies and on improving the efficiency and capabilities of our existing packaging and test services. Technology development is a basic competence of ChipPAC and a key competitive factor in the packaging industry. We have invested considerable resources and we are among the leaders in new product and technology development. During the past two years, we have introduced the following new package families: . Flip-Chip CSP Flip-Chip chip scale package . EconoCSP/(TM)/ Econo chip scale package . M/2/CSP/(TM)/ Molded multi-die chip scale package . MicroBGA Micro ball grid array . LFCSP/(TM)/ Lead frame chip scale package . EconoLGA/(TM)/ Econo land grid array . M/2/BGA/(TM)/ Molded multi-die ball grid array . FlipPAC/(TM)/ Flip package . TBGA-I Tape ball grid array one electrical plane . TBGA-II Tape ball grid array two electrical plane . TEBGA+ Thermally enhanced ball grid array plus integrated passive component . iModule/(TM)/ Integrated module Materials engineering plays a critical role in advanced packaging and has enabled us to develop environmentally friendly lead free and halogen free packaging already required by several of our customers. We have established two design centers where new packages are designed and fully characterized for performance and tested both for package and system level reliability to meet end customer needs. During 2001 and 2000, we spent approximately $14.2 million and $12.0 million, respectively, on research and development. 13 Competition The packaging and test industry is highly fragmented. Our primary competitors and their primary locations are as follows: . Advanced Semiconductor Engineering, Inc.--Taiwan . Amkor Technology, Inc.--South Korea and the Philippines . ASE Test Limited--Taiwan and Malaysia . Siliconware Precision Industries Co., Ltd.--Taiwan Each of these companies has significant packaging capacity, financial resources, research and development operations, marketing and other capabilities, and has some degree of operating experience. These companies also have established relationships with many large semiconductor companies, which are current or potential customers of ours. We also compete with the internal packaging and testing capabilities of many of our largest customers. We believe the principal elements of competition in the independent semiconductor packaging market include time-to-market, breadth of packaging services, technical competence, design services, quality, yield, customer service and price. We believe that we compete favorably in these areas. Due in significant part to the lengthy and costly process of qualifying a supplier, most semiconductor manufacturers generally have two or more sources of packaging services. Employees As of December 31, 2001, we employed 5,445 full-time employees, of whom approximately 109 were employed in research and development, 5,039 in packaging and test services and 297 in marketing, sales, customer service and administration. Approximately 1,400 of our employees at the Ichon, South Korea facility are represented by ChipPAC Korea Labor Union and are covered by collective bargaining and wage agreements. The collective bargaining agreement, which covers basic union activities, working conditions and welfare programs, among other things, is effective to May 1, 2003 and the wage agreement is effective to May 1, 2002. We believe that we have good relationships with our employees and unions. ITEM 2. PROPERTIES Our corporate headquarters are located in Fremont, California, and we provide all packaging, test and distribution services through facilities in Ichon and Chungju, South Korea, Shanghai, China and Kuala Lumpur, Malaysia. The Ichon facility was founded in 1985 and is both ISO-9002 and QS-9000 certified. The Shanghai facility was founded in 1994 and is also ISO-9002 certified and QS-9000 certified. The Kuala Lumpur facility is ISO-9002, QS-9000 and ISO-14001 certified. 14 The following chart summarizes the information about our facilities:
Principal Packaging or Facility Location Leased/Owned Sq. Ft. Functions/Services Service Provided - --------------------- -------------- ------- ------------------------ ----------------------------- Fremont, California Leased 56,320 Executive Offices, Sales, Marketing, Research and Development, Administration and Sales, Marketing and Design Review Services Administration Pleasanton, California Leased 1,800 Sales, Marketing and Sales, Marketing and Administration Administration Services Chandler, Arizona Leased 5,000 Research and Development, Design and Characteri- Sales and Marketing zation Services Shanghai, China Owned (1) 442,000 Packaging and Test Services, Leaded IC, Chip-Scale Warehousing Services Packaging, Test and Distribution Services Ichon, South Korea Leased 474,000 Packaging and Test Services, Advanced Leaded, BGA Research and Development, Packaging, Chip-Scale, Warehousing Services Flip-Chip, Test and Distribution Services Chungju, South Korea Leased 129,000 Electroplating Electroplated Leadframes Leadframes for Ichon, South Korea Kuala Lumpur, Malaysia Owned (1) 524,000 Packaging and Test Services, Discrete Power, Leaded Warehousing Services IC, Test and Distribution Services
- -------- (1) Building and improvements are owned by ChipPAC but upon the termination of the existing long-term land lease revert to the lessor in the years 2044 end 2086 for our facilities in Shanghai, China and Kuala Lumpur, Malaysia, respectively. ITEM 3. LEGAL PROCEEDINGS We are not involved in any legal proceedings, the outcome of which we believe would have a material adverse effect on our business, financial condition or results of operations. From time to time, however, we are involved in claims that arise in the ordinary course of business, and we maintain insurance that we believe to be adequate to cover these claims. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of our stockholders during the fourth quarter of 2001. 15 Part II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our Class A common stock is traded on the Nasdaq National Market under the symbol "CHPC." Public trading of the Class A common stock began on August 9, 2000. Prior to that, there was no public market for our common stock. The following table sets forth, for the periods indicated, the high and low sale price per share of the our Class A common stock as quoted on the Nasdaq National Market.
HIGH LOW 2002 ------- ------- January 1, 2002 - March 15, 2002 ................ $ 9.950 $ 5.230 2001 Fourth Quarter .................................. 8.590 1.850 Third Quarter ................................... 11.590 1.800 Second Quarter .................................. 10.690 3.750 First Quarter ................................... 6.675 2.781 2000 Fourth Quarter .................................. 12.375 2.188 August 9, 2000 - September 30, 2000 ............. 19.500 11.188
As of March 5, 2002, there were approximately 95 stockholders of record of our Class A common stock. DIVIDEND POLICY We have not in the past paid, and do not expect for the foreseeable future to pay dividends on our common stock. Instead, it is anticipated that all earnings, if any, in the foreseeable future will be used for working capital and other general corporate purposes. The payment of dividends by us to holders of our common stock is prohibited by our senior credit facility and is restricted by the indenture relating to our senior subordinated notes. Any future determination to pay dividends will be at the discretion of the board of directors and will depend upon, among other factors, the results of operations, financial condition, capital requirements and contractual restrictions. 16 ITEM 6. SELECTED FINANCIAL DATA ChipPAC, Inc. Selected Historical Financial Data (In thousands)
For the Years Ended December 31, 2001 2000 1999 1998 1997 --------- --------- --------- --------- --------- Statement of Operations Data Revenue $ 328,701 $ 494,411 $ 375,530 $ 334,081 $ 289,429 Gross profit 31,113 109,144 58,042 63,716 60,191 Operating income (loss) (55,229) 62,330 12,619 40,429 25,518 Net income (loss) (93,736) 12,056 (7,308) 32,303 (46,118) Net income (loss) available to common stockholders (93,736) 2,869 (11,528) 32,303 (46,118) Net income (loss) per share available to common stockholders: Basic ($1.36) $ 0.05 ($0.30) $ 0.83 ($1.19) Diluted ($1.36) $ 0.05 ($0.30) $ 0.83 ($1.19) ------------------------------------------------------------- Shares use in per share calculation: Basic 68,878 57,067 38,935 38,861 38,861 Diluted 68,878 58,253 38,935 38,861 38,861 ------------------------------------------------------------- Other Financial Data: Depreciation and amortization $ 59,909 $ 45,049 $ 56,701 $ 45,855 $ 40,682 Debt issue amortization 2,112 1,950 774 -- -- Acquisition of property and equipment 46,392 93,174 57,856 61,332 136,594 Balance Sheet Data (at period end): Cash and cash equivalents $ 41,872 $ 18,850 $ 32,117 $ 68,767 $ 3,067 Accounts receivable, less allowance for doubtful accounts 32,034 45,904 30,003 37,729 30,156 Working capital (17,981) (16,296) 10,224 20,320 29,637 Total assets 430,715 469,245 343,429 359,472 233,241 Total long-term debt, including current portion 333,627 290,200 300,000 133,715 152,410 Mandatorily redeemable preferred stock -- -- 82,970 -- -- Total stockholders' equity (deficit) (23,226) 65,697 (122,886) 113,191 9,472
17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations covers in part periods prior to the completion of our recapitalization in August 1999 and prior to our initial public offering in August 2000. As part of our recapitalization, we entered into financing arrangements and, as a result, we have a different capital structure. As a result of the initial public offering, we again significantly changed our capitalization. Accordingly, the results of operations for periods subsequent to the recapitalization and initial public offering are not necessarily comparable to prior periods. The following discussion should be read in conjunction with the consolidated financial statements contained in this annual report. Overview In 1997, we were incorporated as a distinct entity and established as the parent of a stand-alone worldwide business. Prior to this time, we operated as a separate division of Hyundai Electronics, now Hynix Semiconductor, one of the world's largest semiconductor manufacturers and a member of the Hyundai Group, the South Korean conglomerate. In 1999, as part of a recapitalization, a group of equity investors along with management obtained control of ChipPAC. This transaction was accounted for as a recapitalization. Our revenue consists of fees charged to our customers for packaging, testing, and distribution of their integrated circuits. From 1996 to 2001, revenue increased from $179.2 million to $328.7 million, a cumulative annual growth rate of 11.4%, primarily from the growth of substrate, or BGA packaging, and, in 2000, from the growth of test revenue and the acquisition of our Malaysian business. The semiconductor industry is however inherently volatile, with sharp periodic downturns and slowdowns. These downturns have been characterized by, among other things, diminished product demand, excess production capacity and accelerated erosion of selling prices. The semiconductor industry is presently recovering from the worst downturn in its history. We expect conditions to improve in 2002. Due to the severity of this downturn for the semiconductor industry and for our customers, we have also experienced the first decline in revenue on a year-over-year basis in our history. This in turn has had a significant impact on our operating results. Our revenue for the year ended December 31, 2001 declined to $328.7 million or by 33.5% compared to the year ended December 31, 2000. The semiconductor industry has historically experienced volatility, with sharp periodic downturns and slowdowns. These downturns have been characterized by, among other things, diminished product demand, excess production capacity and accelerated erosion of selling prices. The semiconductor industry is presently recovering from a downturn, and we expect conditions to improve in 2002. Based on current general economic and semiconductor market expectations, we believe it is likely we could achieve 11.0% revenue growth in 2002 as compared to 2001. This growth assumes a replenishment of inventory in the electronics supply chain, gradual recovery in our end markets and ramp-up of new customers acquired in 2001. Based on these assumptions, we believe gross margins could increase to approximately 18.0% to 20.0%, in the second half of 2002 as compared to approximately 5.2% for the second half of 2001 and that operating income could be approximately 8.8% of revenue in the second half of 2002. Based on these estimates, we expect to be profitable on a quarterly basis by the end of 2002. If our current assumptions and estimates are correct, operating expenses (selling, general, administrative, and research and development expenses) are expected to be approximately 12.0% of revenue for 2002. Management is constantly re-evaluating estimates and the expectations above could and probably will change as the year unfolds. 18 The following table describes the composition of revenue by product group and test services, as a percentage of total revenue: Year Ended December 31, ------------------- 2001 2000 1999 ----- ----- ----- Laminate ...................... 46.0% 55.8% 68.1% Leaded ........................ 40.2 35.0 29.1 Test .......................... 13.8 9.2 2.8 ----- ----- ----- Total ...................... 100.0% 100.0% 100.0% ===== ===== ===== Quarterly Results (Unaudited) The following table describes our unaudited historical quarterly sales, gross profit, earnings per share and net income:
2001 2000 ------------------------------------------ ------------------------------------- Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 -------- ------- -------- -------- -------- -------- -------- -------- (in thousands, except per share amount) Revenue ....................................... $ 89,859 $87,373 $ 74,662 $ 76,807 $97,469 $108,979 $155,795 $132,168 Gross profit .................................. 11,721 11,460 2,025 5,907 20,422 26,141 35,568 27,013 Gross margin .................................. 13.0% 13.1% 2.7% 7.7% 21.0% 24.0% 22.8% 20.4% Writedown of impaired assets .................. - - - 34,688 - - - - Restructuring charge .......................... 2,962 - - 3,270 - - - - Income (loss) before extraordinary item ....... $ (9,667) $(7,513) $(16,441) $ (60,115) $ 2,160 $ 5,632 $ 3,944 $ 2,710 Income (loss) per share available to common stockholders before extraordinary item Basic ....................................... $ (0.14) $ (0.11) $ (0.24) $ (0.87) $ (0.01) $ 0.06 $ 0.03 $ 0.04 Diluted ..................................... (0.14) (0.11) (0.24) (0.87) (0.01) 0.05 0.03 0.04 Net income (loss) ............................. $ (9,667) $(7,513) $(16,441) $ (60,115) $ 2,160 $ 5,635 $ 1,554 $ 2,710
19 Results of Operations The following table describes our results of operations based on the percentage relationship of operating and other financial data to revenue during the periods shown:
Year Ended December 31, ------------------- 2001 2000 1999 ----- ----- ----- Historical Statement of Operations Data: Revenue ............................................................... 100.0% 100.0% 100.0% Gross margin ......................................................... 9.4 22.1 15.5 Selling, general & administrative .................................... 9.5 7.0 5.7 Research & development ............................................... 4.3 2.4 3.3 Restructuring/other expenses ......................................... 12.4 -- 3.2 ----- ---- ---- Operating income ..................................................... (16.8)% 12.6% 3.4% ===== ==== ====
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 Revenue. Revenue was $328.7 million in the year ended December 31, 2001, a decrease of 33.5% from the year ended December 31, 2000. The decline in revenue is a result of lower end-market demand for our customers' products. This decrease was realized across all the end markets we serve and was not significantly concentrated in any one end market. We believe that our customers purchased product for their inventory in amounts consistent with historical demand. Thus, as end-user demand dropped, our customers' inventories increased, thereby decreasing demand for our products. Gross Profit. Gross profit during the year ended December 31, 2001 was $31.1 million, a decrease of 71.5% from the year ended December 31, 2000. The majority of the decrease was caused by lower demand leading to lower equipment utilization as well as lower average selling prices in the year ended December 31, 2001 compared to the year ended December 31, 2000. Equipment utilization was 52.0% and 57.0% for the years ended December 31, 2001 and 2000, respectively. Although reductions in force, furloughs, plant shutdown days and other cost saving methods were used in the year ended December 31, 2001, they were insufficient to offset the decline in revenue. Selling, General, and Administrative. Selling, general, and administrative expenses were $31.2 million in the year ended December 31, 2001, a decrease of 10.3% from the year ended December 31, 2000. Expenses declined compared to 2000, because we implemented strict cost controls in reaction to the decline in revenue and because of the reductions in force we implemented in the first quarter of 2001. In addition, we incurred staffing expenses in the second half of 2000 related to our initial public offering that did not occur in 2001. 20 Research and development expenses for the year ended December 31, 2001 were $14.2 million, or 4.3% of revenue, compared to $12.0 million, or 2.4% of revenue, in the year ended December 31, 2000. Our research and development expenses in 2001 represent an 18.3% increase from similar expenses in 2000. The increases were mainly due to expenses related to power packaging technology, new processes development and flip-chip technology development. Restructuring, write down of impaired assets and other charges. During the year ended December 31, 2001, the Company wrote down impaired assets by $34.7 million. The asset write down relates primarily to the Company's manufacturing assets in the assembly and test facilities in South Korea and Malaysia. The Company determined that due to excess capacity the future expected cash flows related to equipment for certain niche package types will not be sufficient to recover the carrying value of the manufacturing equipment for those package types in the facility. The carrying values of these assets were written down to the estimated fair market value and will continue to be depreciated over the remaining useful lives. There were no equivalent write offs in the year ended December 31, 2000. In addition, we recorded expenses associated with reduction in force and furlough costs of $4.7 million and a loss reserve of $1.5 million on executive officers loans forgiveness in 2002, that occurred in the year ended December 31, 2001 with no comparable costs in 2000. Interest Expense. Total outstanding interest bearing debt increased to $383.6 million at December 31, 2001 compared to $298.0 million at December 31, 2000. The increase in debt was primarily due to draw down of our revolving credit line for general corporate purposes and issuance of $50.0 million of convertible debt and $15.0 million of additional high yield borrow in June 2001. Related interest expense was $37.2 million for the year ended December 31, 2001, a decrease of 5.6% compared to the year ended December 31, 2000. The reduction in interest expense was primarily due to reduced interest rates on our debt. Foreign Currency Gains. Net foreign currency gains were $0.19 million and $2.17 million for the years ended December 31, 2001 and 2000, respectively. These non-cash gains are primarily due to the fluctuations between the exchange rate of the United States Dollar and the South Korean Won related to long-term pension benefits payable to our South Korean employees. Other (Income) and Expenses. Other (income) and expenses, net, was ($0.4) million and $7.9 million for the years ended December 31, 2001 and 2000, respectively. Other expenses for December 31, 2000 includes the one-time payment of $8.0 million, paid to Bain Capital and SXI Group in exchange for the termination of two advisory agreements, which were entered into during our recapitalization in 1999. There were no equivalent expenditures related to this one-time payment in the year ended December 31, 2001. Accretion of Dividends and Recorded Value of the Intel Warrant. Accretion of dividends on preferred stock and the recorded value of the Intel Warrant was $0 in the year ended December 31, 2001, compared to $9.2 million in the year ended December 31, 2000. All preferred stock was redeemed or converted to non-dividend bearing Class A common stock concurrent with our initial public offering in August 2000. The Intel Warrant expired unexercised in February 2001. Income Taxes. Income tax expense was $2.6 million and $3.6 million for the years ended December 31, 2001 and 2000,respectively, for an effective tax rates of approximately (2.8%) in 2001 and 20.0% in 2000. Concurrently with our recapitalization on August 5, 1999, the company was reorganized and as a result now has operations and earnings in jurisdictions with relatively low income tax rates, or where we enjoy tax holidays or other similar tax benefits. Net (Loss) Income Available to Common Stockholders. As a result of the items above, net (loss) available to common stockholders increased to ($93.7) million for the year ended December 31, 2001, compared to net income of $2.9 million for the year ended December 31, 2000. 21 Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Revenue. Revenue in 2000 increased 31.7% to $494.4 million from $375.5 million in 1999. We experienced strong increases across all product lines. Laminate sales increased 7.9% over 1999. Leaded sales, not including those attributable to our acquisition of the Malaysian business, increased 32.2% over 1999 and test revenue increased 186.4% over 1999. Increases in revenue were broadly distributed across all of our end markets, but the communications segment showed an increase of 99.4%. During the last six months of 2000, the Malaysian business contributed $44.0 million in revenue. Gross Profit. Gross Profit increased to $109.1 million in 2000 from $58.0 million in 1999, resulting in a gross margin of 22.1% compared to 15.5% in 1999. Effective January 1, 2000 we re-evaluated the estimated useful lives of our property, plant and equipment. Based on our internal assessment of historical experience, a third party appraisal, and future expectations of the useful lives of our property, plant and equipment, the useful lives were changed from five years to eight years. The net book values of assembly and test product equipment and furniture and fixtures already in use are now being depreciated over the remaining useful life, based on eight years from the date the assets were originally placed in service. This change resulted in depreciation expense for the year ended December 31, 2000 being $29.0 million lower than we would have recorded if we had continued to use five-year lives. The remaining increase in gross profit was attributable to improved materials procurement and greater efficiency due to high utilization rates partially offset by an increase in average labor costs, the effect of the Malaysian business acquisition, and the strengthening of the South Korean Won against the U.S. Dollar in 2000 versus the prior year. Selling, General, and Administrative. Selling, general and administrative expenses increased to $34.8 million in 2000 from $21.2 million in 1999. As a percentage of revenue, these expenses increased to 7.0% from 5.7%. In 2000 we hired new personnel at the management level to accommodate both our expanded operations and our transition to a public company. As a result, we incurred additional expenses associated with hiring in the areas of administration, sales, and marketing. Research and Development. Research and development expenses decreased to $12.0 million in 2000 from $12.4 million in 1999. As a percentage of revenue, these expenses decreased to 2.4% from 3.3%. The decrease, as a percentage of revenue, was mainly caused by the additional revenue from the Malaysia business that did not require as high research and development expenditures in 2000 as the required intellectual property and process technology for the Malaysian business was acquired in the purchase. Restructuring and Other Charges. As a result of our recapitalization, we were contractually required to make a one-time change of control payment to our unionized South Korean employees of approximately $11.8 million. The payment was recorded as an operating expense during the year ended December 31, 1999. This expense did not reoccur in 2000. Interest Income. Interest income decreased to $0.8 million in 2000 compared to $2.8 million in 1999. The average cash balance maintained in 2000 was significantly lower than in 1999 due to the working capital and fixed asset investments needed to support our growth. 22 Interest Expense. Interest expense for 2000 increased 85.8% to $39.4 million in 2000 from $21.2 million in 1999. This is primarily due to 12 months of interest expense on the debt incurred as part of the recapitalization compared to five months of interest payments in 1999. In addition, we incurred interest expense on the debt incurred to complete the Malaysian acquisition. Foreign Currency Gains. The foreign currency gain was $2.2 million in 2000 compared to $1.2 million in the prior year period. The exposure to foreign currency gains and losses has been significantly mitigated by two related factors. First, we negotiated with the large majority of our material and equipment suppliers to denominate purchase transactions in U.S. Dollars. Second, on October 1, 1999, we changed our functional currency to the U.S. Dollar from the local currencies of the South Korean and Chinese subsidiaries. Other Income/Expense. Other expense increased $7.9 million in 2000 compared to other income of $0.7 million in 1999. This was primarily due to the one time charge of $8.0 million to end the management services agreements with Bain Capital and SXI group. Income Taxes. Income tax expense was $3.6 million in 2000 compared to $1.9 million in 1999. Our effective tax rate was 20.0% in 2000 compared to (48.5%) in 1999. Our effective tax rate during 1999 was adversely affected by losses of the operations in China, for which no tax benefit was realized. The recapitalization also changed the tax structure and overall effective tax rate compared to 1999. Extraordinary Loss. We incurred an extraordinary loss of $2.4 million and $1.4 million, net of tax benefit, for the years ended December 31, 2000 and 1999, respectively. The 2000 extraordinary loss was related to the early repayment of our senior term debt that was used in the acquisition of Intersil's Malaysian business that was subsequently repaid using proceeds from our initial public offering. In 1999, the extraordinary loss was related to the early retirement of debt upon the recapitalization of our company. Net Income. As a result of the items described above, our net income increased to $12.1 million in 2000 compared to a net loss of $7.3 million in 1999. CRITICAL ACCOUNTING POLICIES We believe the following accounting policies are most important to the portrayal of our financial condition and results of operations and require our significant judgments. We have made and expect to continue to make significant investments in fixed assets, intellectual property and related intangible assets. Management evaluates the valuation of these assets every quarter paying special attention to events or changes in circumstances that would indicate that their carrying amount might not be recoverable. We determine whether or not the assets are recoverable based on estimated undiscounted future cash flows to be generated by the assets and if not, we calculate the amount of the impairment charge based on estimated discounted future cash flows to be generated by the assets or appraised fair value. If different assumptions or conditions were to prevail rather than those used in estimating future cash flows, significantly different determination of recoverability or of fair value for these assets and results of operations could be reported. We recorded an asset impairment charge of $34.7 million for the year ended December 31, 2001. In addition, management uses judgment when setting expected asset useful lives for long-lived assets. The asset useful lives used are based on historical experience and future expectations. However, business conditions or underlying technology may change in the future which could cause a change in asset lives. Any change in lives would cause a significant change in depreciation and amortization. After the recapitalization (see Note 1 to the consolidated financial statements), we reassessed the asset useful lives for our long-lived assets in 2000 and changed the useful lives from five years to eight years. This change resulted in depreciation expense for the year ended December 31, 2000 being $29.0 million lower than would have been recorded using five-year lives. 23 We record estimated reductions to revenue for customer programs and incentive offerings including special pricing agreements, price protection, promotions and other volume-based incentives. If market conditions were to decline, we may take actions to increase customer incentive offerings possibly resulting in an incremental reduction of revenue at the time the incentive is offered. Furthermore, if anticipated volume levels turn out to be different, this would impact reductions to revenue and accrued customer rebates. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. We write down inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions less costs to dispose. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. In the year ended December 31, 2001, we increased the valuation allowance to reduce deferred tax assets to the amount, we believe, is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. Liquidity and Capital Resources Our ongoing primary cash needs are for operations and equipment purchases. We spent $46.4 million on capital expenditures during the year ended December 31, 2001 compared to $93.2 million in capital expenditures during the year ended December 31, 2000. We anticipate spending $30.0 million in capital expenditures in 2002, not including any buy out of operating leases, which we expect will not exceed $18.0 million in 2002. We no longer have the ability to borrow additional funds under the $20.0 million capital expenditure line portion of our senior credit facilities, which expired on July 31, 2001. Outstanding borrowing on the capital expenditure line at December 31, 2001 was $14.1 million and bore a weighted average interest rate of 6.77% in 2001. 24 Under the terms of the agreement relating to our acquisition of the Malaysian business, during the period from June 1, 2000 to June 30, 2003, Intersil is entitled to receive additional contingent incentive payments based upon the achievement of milestones relating to the transfer of business previously subcontracted by Intersil to a third party. In the event that Intersil were to achieve all the milestones, we would pay Intersil an additional sum of approximately $17.9 million in the aggregate. As of December 31, 2001, we have cumulatively paid Intersil $7.9 million under this arrangement. In June 2001, we issued $50.0 million of 8.0% convertible subordinated notes and $15.0 million of 12.75% senior subordinated notes in a private placement. A majority of these funds were used to pay down our term loans and revolving loans under the senior credit facility. The $50.0 million of 8.0% convertible subordinated notes are convertible into shares of our Class A common stock at a conversion price of $9.96 per share, subject to adjustment at any time prior to June 15, 2011 and bear an interest rate of 8.0% per annum. The $15.0 million of 12.75% senior subordinated notes bear an interest rate of 12.75% per annum and mature on August 1, 2009. As of December 31, 2001, our total debt consisted of $383.6 million of borrowings, which was comprised of $50.0 million of revolving loans, (which fully utilized the borrowing capacity under our revolving loans), $118.6 million in term loans, $165.0 million of senior subordinated notes and $50.0 million of convertible subordinated notes. The revolving credit line under our senior credit facilities matures on July 31, 2005, and had a weighted average interest rate of 6.0% in 2001. The term loans mature on July 31, 2005, have amortization payments due each quarter and had a weighted average interest rate of 8.2% in 2001. Our total potential commitments on our loans, operating leases, Intersil incentive payments, royalty and license agreements as of December 31, 2001, were as follows: (in thousands)
Within 1 -------- Total Year 2 - 3 Years 4 - 5 Years After 5 Years ----- ---- ------------ ------------- ------------- On balance sheet commitments: Senior credit facilities $168,627 $50,000 $40,004 $78,623 $ - Senior subordinated notes 165,000 - - - 165,000 Convertible subordinated notes 50,000 - - - 50,000 ----------------------------------- --------------------------------- Total on balance sheet commitments 383,627 50,000 40,004 78,623 215,000 ----------------------------------- --------------------------------- Off balance sheet commitments: Operating leases 85,436 16,790 23,690 13,760 31,196 Royalty/licensing agreements 1,000 1,000 - - - Restructuring, net 3,324 3,324 - - - Contingent payments to Intersil (relating to purchase of Malaysian business) 10,020 6,544 3,476 - - ----------------------------------- --------------------------------- Total off balance sheet commitments 99,780 27,658 27,166 13,760 31,196 ----------------------------------- --------------------------------- Total commitments $483,408 $77,658 $67,170 $92,384 $246,196 =====================================================================
25 Our senior credit facilities require that we meet specified financial tests, including, without limitation, a maximum leverage ratio, a minimum interest coverage ratio, minimum fixed charge coverage ratio, a maximum senior leverage ratio and, for 2002 only, a minimum consolidated adjusted EBITDA amount. In conjunction with our $65.0 million private placement in June 2001, the lenders of our senior credit facilities amended the financial tests for the period July 1, 2001 through December 31, 2004. Our senior credit facilities also contain covenants restricting our operations. There were no violations of these covenants through December 31, 2001 amended as follows. On December 31, 2001, these covenants were waived for 2002 and three new covenants were established for 2002: (1) a requirement to raise at least $20.0 million in junior capital by March 1, 2002, which was fulfilled by us through an underwritten public offering of our Class A common stock, which was completed in January 2002, (2) a minimum EBITDA requirement based on a rolling 12 months ending March 31, 2002, June 30, 2002, September 30, 2002 and December 31, 2002, of $30.0 million, $26.0 million, $32.0 million and $40.0 million, respectively, and (3) a capital expenditures limit of $30.0 million in 2002 with an exemption for a buyout of existing operating leases. In January 2002 we issued 11.4 million shares of our Class A common stock in an underwritten public offering. Not only did this offering meet the requirements of our debt instruments but the net proceeds of the offering also allowed us to pay off the entire amount outstanding under our revolving loans and a portion of the principal amount of our term loans. See a further discussion of this offering and the use of proceeds from it below under "Subsequent Common Stock Offering." The weakness in demand in 2001 for packaging and test services has adversely affected our cash flows from operations. We believe that our existing cash balances, cash flows from operations and available borrowings under our senior credit facilities provide sufficient cash resources to meet our projected operating and other cash requirements for the next twelve months. An event of default under any debt instrument, if not cured or waived, could have a material adverse effect on us. We may require capital sooner than currently expected. We cannot assure you that additional financing will be available when we need it or, if available, that it will be available on satisfactory terms. In addition, the terms of our senior credit facilities and senior subordinated notes significantly reduce our ability to incur additional debt. Failure to obtain any such required additional financing could have a material adverse effect on our company. Other than the covenants on the debt as discussed above, we have no performance guarantees or unconsolidated entities. Our off-balance sheets commitments are limited to equipment operating leases, leases on office and manufacturing space and additional contingent incentive payments to Intersil. Our total off-balance obligations are approximately $99.8 million. In 2001, 2000, and 1999 cash (used in) provided by operations was ($12.2) million, $46.2 million, and $45.9 million, respectively. Cash from operations mainly consisted of net (loss) income plus depreciation and amortization less utilization for working capital. In 2001, 2000, and 1999 cash used in investing activities was $52.8 million, $130.5 million, and $56.5 million, respectively. In 2001 and 1999, cash used in investing activities mainly was invested in property and equipment. In 2000, in addition to the acquisition of property and equipment, cash was invested in the purchase of the Malaysian business, including purchased intellectual property. In 2001, 2000, and 1999, cash provided by (used in) financing activities was $88.0 million, $71.0 million, and ($26.5) million, respectively. Cash was mainly provided by or used in debt issuance, debt prepayment, stock issuance, and stock redemption. Derivative Financial Instruments In 1999, we entered into foreign forward contracts to mitigate the effect of foreign currency movements on the cost of materials and equipment. The contracts entered into required the purchase of South Korean Won or Japanese Yen and the delivery of U.S. Dollars, and generally had maturities which did not exceed three months. Because the contracts entered into did not qualify as hedges under generally accepted accounting principles in the United States of America, the gains and losses from the contracts were recorded as foreign currency gains and losses. We had a net loss of $0.8 million in 1999 arising from forward foreign currency contracts. We had no gain or loss in 2001 and 2000. 26 As of December 31, 2001, we had no foreign currency contracts outstanding. Recent Accounting Pronouncements In July 2001, FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting. The use of the pooling-of-interest method of accounting is no longer allowed. SFAS No. 142 requires that goodwill and other intangible assets will no longer be amortized but shall be reviewed and tested annually for impairment. SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001, and early adoption is permitted for companies with a fiscal year beginning after March 15, 2001. We expect that the adoption of SFAS No.141 and 142 on January 1, 2002, will not have a material effect on our financial statements. In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of" and the accounting and reporting provision of Accounting Principles Board ("APB") No. 30, "Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 addresses financial accounting and reporting for impairment or disposal of long-lived assets including amortizable intangibles and is effective for fiscal years beginning December 15, 2001 as well as interim periods within those fiscal years. SFAS No. 144 does not apply to the impairment of goodwill and non-amortizable intangibles. We are currently reviewing this statement to determine its effect on our financial position and results of operations. Acquisition of Malaysian Business On June 30, 2000, we consummated our acquisition of Intersil's packaging and test operations located in Kuala Lumpur, Malaysia along with related intellectual property for approximately $71.5 million in cash and preferred stock. In connection with the acquisition, we entered into a five-year supply agreement with Intersil to provide Intersil assembly and test services on an exclusive basis. The Malaysian business increases opportunities in high growth advanced communications products, provides a presence in Malaysia near emerging wafer foundries, broadens our package portfolio and enhances our intellectual property in key areas. In addition, the Malaysian business expands our mixed-signal testing capabilities and provides us with critical expertise in RF testing. We accounted for the Malaysian acquisition using purchase accounting. Under purchase accounting, the total purchase price of the Malaysian business is allocated to the acquired assets and liabilities based on their relative fair values as of the closing date of the acquisition. The purchase price of $71.5 million represents the total of the cash consideration (including direct costs of the acquisition) and the estimated fair value of the Class C preferred stock exchanged for the whole of the issued shares of the Malaysian business and certain intellectual property associated with it. The terms of the acquisition of the Malaysian business require us to pay until June 30, 2003 additional contingent incentive payments to Intersil based on the achievement of milestones with respect to the transfer of the seller's packaging business, currently subcontracted by Intersil to third parties, to us. We will record these contingent payments as additional purchase price if and when they are earned and paid on a quarterly basis. In the event that Intersil were to achieve all the milestones, we would pay Intersil an additional sum of approximately $17.9 million in the aggregate. For the years ended December 31, 2001 and 2000, we have paid $7.5 million and $0.4 million, respectively, for a cumulative total of $7.9 million. These payments increased the effective purchase price and were allocated to non-current assets. Additionally, $2.4 million of other purchase price adjustments were recorded based on the difference between the final closing balance sheet and the estimated closing balance sheet of the Malaysian business and deferred tax of $3.1 million on the total of these purchase price adjustments. This resulted in a further increase in non-current assets. 27 The amount and components of the purchase price along with the allocation of the purchase price to assets purchased and liabilities assumed as of December 31, 2001 were as follows:
(in millions) Purchase Price: Cash consideration ..................................... $62.8 Estimated fair value of Class C preferred stock ........ 15.8 Deferred taxes ......................................... 3.1 Expenses ............................................... 5.0 Less: payment due from Intersil ......................... (1.8) ----- $84.9 ===== Allocation of Purchase Price: Land and buildings .................................... $19.3 Plant and equipment ................................... 66.4 Intellectual property ................................. 14.2 Restructuring accrual ................................. (7.4) Deferred taxes ........................................ (4.1) Net other assets and liabilities ...................... (3.5) ----- $84.9 =====
There is no goodwill arising from the acquisition of the Malaysian business. The fair value of total assets and liabilities exceeded the purchase price by $42.8 million. This amount has been allocated in full to non-current assets as summarized below:
Excess of Estimated Fair Value Over Fair Purchase Price Adjusted Non-current asset Value Allocated Fair Value - ----------------- ----- --------- ---------- (in millions) Land and buildings .................. $ 27.9 $( 8.6) $ 19.3 Plant and equipment ................. 93.9 (27.5) 66.4 Intellectual property ............... 20.9 (6.7) 14.2 ------ ------ ------ $142.7 $(42.8) $ 99.9 ====== ====== ======
Intellectual property we acquired along with the Malaysian business primarily consists of trade secrets and patents. The estimated average useful life of these assets is between five and nine years. 28 An accrual of $7.4 million was established for expected costs of restructuring the Malaysian business. As of December 31, 2001 and 2000, $2.3 million and $4.9 million of these one time non-recurring costs have been incurred in connection with our factory reorganization, product discontinuance and employee related costs. As of December 31, 2001, a total of $0.2 million remains for completion of the purchase activities. We began formulating exit plans and termination data during our due diligence relating to the acquisition of the Malaysian business. The accrual was originally comprised of $5.0 million for involuntary termination benefits and $2.4 million of other exit activities. Actual involuntary termination benefits and other exit costs amounted to $7.0 million and $0.2 million, respectively. The projected number of planned reductions in head count as a result of this planned restructuring was 380 employees, with an actual reduction of 373 employees. All restructuring activities were completed in the year ended December 31, 2001, and there are no unresolved contingencies or purchase price allocation issues. The results of operations of the Malaysian business have been included with our results of operations for periods subsequent to June 30, 2000. Set forth below is the unaudited pro forma combined summary of operations of our Company for the years ended December 31, 2000 and 1999, as if the acquisition had been made on January 1, 1999 (in thousands, except for per share amounts). Pro Forma Disclosure December 31, 2000 1999 -------------------------- (unaudited) (unaudited) Net sales $536,326 $477,394 Income before extraordinary item 9,165 7,009 Net income 6,775 6,749 Earnings per share Basic $ 0.10 $ 0.12 -------- -------- Diluted $ 0.10 $ 0.12 -------- -------- Shares used in per share calculation: Basic 68,367 54,002 -------- -------- Diluted 69,553 54,601 -------- -------- 29 Subsequent Common Stock Offering On January 30, 2002, we sold 10,000,000 shares of Class A common stock in an underwritten public offering at a public offering price of $6.00 per share. In connection with this sale, we received net proceeds of approximately $56.2 million, after deducting underwriting discounts, commissions and estimated offering expenses. We used the net proceeds of the $56.2 million from this offering to pay down term loans and revolving loans, respectively. The term loans had a weighted average interest rate of 8.2% for the year ended December 31, 2001, have scheduled amortization payments each quarter and mature on July 31, 2005. The revolving loans had a weighted average interest rate of 6.0% for the year ended December 31, 2001 and mature on July 31, 2005. On February 14, 2002, we sold an additional 1,425,600 shares of Class A common stock in conjunction with the underwriter's exercise of their over allotment option at the public offering price of $6.00 per share. In connection with this sale, we received net proceeds of approximately $8.0 million, after deducting underwriting discounts and commissions and estimated offering expenses. We used $4.0 million of the net proceeds from the sale of the additional shares sold on February 14, 2002 to further pay down term loans. As of February 14, 2002, our term loans had a remaining balance of approximately $86.2 million and our revolving loans had been repaid in its entirety. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. We have no derivative financial instruments. We have long-term debt that carries fixed and variable interest rates. A fluctuation in interest rates of 1% would increase our annual interest charge by approximately $2.9 million. The exposure to foreign currency gains and losses has been significantly mitigated by two related factors. First, we negotiated with the large majority of our material and equipment suppliers to denominate purchase transactions in U.S. Dollars. Second, on October 1, 1999, we changed our functional currency to the U.S. Dollar from the local currencies of our South Korean and Chinese subsidiaries. For the years ended December 31, 2001, 2000 and 1999, we generated approximately 8.1%, 16.7%, and 11.3% of total revenue, respectively, from international markets, primarily from customers in South Korea. In addition, all of the facilities currently used to provide packaging services are located in China, Malaysia and South Korea. Moreover, many of our customers' operations are located in countries outside of the United States of America. We cannot determine if our future operations and earnings will be affected by new laws, new regulations, a volatile political climate, changes in or new interpretations of existing laws or regulations or other consequences of doing business outside the United States of America particularly in China, Malaysia and South Korea. If future operations are negatively affected by these changes, sales or profits may suffer. Investment Risk All of our investments are at fixed rates; therefore, the fair value of these instruments is affected by changes in market interest rates. We believe that the market risk arising from our holdings of investments is minimal as all of our investments mature within one year. 30 Foreign Currency Risk Based on the our overall currency rate exposure at December 31, 2001, a near term 10% appreciation or depreciation in the value of the U.S. dollar would have an insignificant effect on our financial position, results of operations and cash flows over the next fiscal year. There can be no assurance, however, that there will not be a material impact further in the future. A portion of our costs is denominated in foreign currencies like the Chinese Renminbi, the Malaysian Ringgit and the South Korean Won. As a result, changes in the exchange rates of these currencies or any other applicable currencies to the U.S. dollar will affect the cost of goods sold and operating margins and could result in exchange losses. We cannot fully predict the impact of future exchange rate fluctuations on our profitability. From time to time, we may have engaged in, and may continue to engage in, exchange rate hedging activities in an effort to mitigate the impact of exchange rate fluctuations. However, we cannot assure that any hedging technique we implement will be effective. If it is not effective, we may experience reduced operating margins. 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Accountants .......................................... 33 Consolidated Balance Sheets -- December 31, 2001 and 2000 .................. 34 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2001 .......................... 35 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 2001 .......................... 36 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2001 ................................... 38 Notes to Consolidated Financial Statements ................................. 40 Financial Statement Schedule: Schedule II Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 2001 32 Report of Independent Accountants To the Stockholders and Board of Directors of ChipPAC, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity and cash flows, present fairly, in all material respects, the financial position of ChipPAC, Inc. and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP San Jose, California January 30, 2002, except for Note 20, as to which the date is February 14, 2002 33 ChipPAC, Inc. CONSOLIDATED BALANCE SHEETS (In thousands)
December 31, December 31, 2001 2000 --------- --------- Assets Current assets: Cash and cash equivalents $ 41,872 $ 18,850 Accounts receivable, less allowance for doubtful accounts of $449 and $972 32,034 45,904 Inventories (Note 6) 12,481 21,250 Prepaid expenses and other current assets 4,515 6,720 ----------- --------- Total current assets 90,902 92,724 Property, plant and equipment, net (Note 6) 304,650 334,733 Other assets (Note 6) 35,163 41,788 ----------- --------- Total assets $ 430,715 $ 469,245 =========== ========= Liabilities and stockholders' equity (Deficit) Current liabilities: Revolving Loans $ 50,000 $ 7,800 Accounts payable 31,045 54,663 Accrued expenses and other current liabilities (Note 6) 27,838 39,757 Current portion of long-term debt -- 6,800 ----------- --------- Total current liabilities 108,883 109,020 Long-term debt, less current portion 283,627 283,400 Convertible subordinated note 50,000 -- Other long-term liabilities 11,431 11,128 ----------- --------- Total liabilities 453,941 403,548 ----------- --------- Commitments (Note 15) Stockholders' equity (deficit): Common stock, Class A - par value $0.01 per share; 250,000,000 shares authorized, 69,404,000 and 68,438,000 shares issued and outstanding at December 31, 2001 and 2000 694 685 Common stock, Class B - par value $0.01 per share; 250,000,000 shares, no shares issued or outstanding at December 31, 2001 and 2000 -- -- Warrants - Class A common stock -- 1,250 Additional paid in capital 110,043 104,509 Receivable from stockholders (985) (1,505) Accumulated other comprehensive income 9,169 9,169 Accumulated deficit (142,147) (48,411) ----------- --------- Total stockholders' equity (deficit) (23,226) 65,697 ----------- --------- Total liabilities and stockholders' equity (deficit) $ 430,715 $ 469,245 =========== =========
The accompanying notes are an integral part of these financial statements. 34 ChipPAC, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amount)
For the Years Ended December 31, 2001 2000 1999 --------- --------- --------- Revenue $ 328,701 $ 494,411 $ 375,530 Cost of revenue 297,588 385,267 317,488 --------- --------- --------- Gross profit 31,113 109,144 58,042 Operating expenses: --------- --------- --------- Selling, general and administrative 31,199 34,799 21,219 Research and development 14,223 12,015 12,362 Restructuring, write down of impaired assets and other charges 40,920 -- 11,842 --------- --------- --------- Total operating expenses 86,342 46,814 45,423 --------- --------- --------- Operating income (loss) (55,229) 62,330 12,619 Non-operating (income) expenses: Interest expense 37,214 39,432 21,241 Interest income (688) (843) (2,751) Foreign currency gains (187) (2,168) (1,224) Other (income) expenses, net (410) 7,849 (650) --------- --------- --------- Total non-operating (income) expenses 35,929 44,270 16,616 --------- --------- --------- Income (loss) before income taxes and extraordinary items (91,158) 18,060 (3,997) Provision for income taxes 2,578 3,614 1,938 --------- --------- --------- Income (loss) before extraordinary item (93,736) 14,446 (5,935) Extraordinary item: Loss from early extinguishment of debt, net of related income tax benefit -- 2,390 1,373 --------- --------- --------- Net income (loss) (93,736) 12,056 (7,308) Accretion of dividends on mandatorily redeemable preferred stock -- (8,197) (3,960) Accretion of recorded value of the Intel warrant -- (990) (260) --------- --------- --------- Net income (loss) available to common stockholders $ (93,736) $ 2,869 $ (11,528) ========= ========= ========= Comprehensive income: Net income (loss) $ (93,736) $ 12,056 $ (7,308) Currency translation adjustments -- -- (1,309) --------- --------- --------- Comprehensive income loss $ (93,736) $ 12,056 $ (8,617) ========= ========= ========= Income (loss) per share available to common stockholders before extraordinary item Basic $ (1.36) $ 0.09 $ (0.26) Diluted $ (1.36) $ 0.09 $ (0.26) Extraordinary item Basic $ -- $ (0.04) $ (0.04) Diluted $ -- $ (0.04) $ (0.04) Net income (loss) per share available to common stockholders Basic $ (1.36) $ 0.05 $ (0.30) Diluted $ (1.36) $ 0.05 $ (0.30) Shares used in per share calculation: Basic 68,878 57,067 38,935 Diluted 68,878 58,253 38,935
The accompanying notes are an integral part of these financial statements. 35 ChipPAC, Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
Common Stock --------------------- Warrants Divisional Class A Additional Equity, Net Receivable Number of Common Paid in of Capital from Shares Amount Stock Capital Redemption Stockholders ------------------------------------------------------------------------------ Balance as of December 31, 1998 -- $ -- $ -- $ -- $ 180,091 $ (37,626) Proceed from common stock issuance at recapitalization, net of issuance cost of $17,982 38,861 389 -- 83,629 (10,000) -- Sale of common stock and exercise of stock options 1,794 18 -- 2,781 -- (1,128) Capital contribution -- -- -- -- (16,401) 37,626 Conversion of divisional equity to mandatorily redeemable preferred stock -- -- -- -- (30,000) -- Capital redemption at recapitalization -- -- -- -- (311,220) -- Capital contribution by HEI at recapitalization -- -- -- -- 19,816 -- Transfer of divisional equity upon recapitalization -- -- -- (167,714) 167,714 -- Issuance of Intel warrant -- -- 1,250 -- -- -- Accretion of recorded value of Intel warrant -- -- -- -- -- -- Dividend accretion of mandatorily redeemable preferred stock -- -- -- -- -- -- Currency translation loss -- -- -- -- -- -- Net loss -- -- -- -- -- -- ------------------------------------------------------------------------------ Balance as of December 31, 1999 40,655 407 1,250 (81,304) -- (1,128) Repayment of amount due from stockholders 185 Sale of common stock 510 5 -- 1,181 -- (562) Common stock repurchased by Company during the year (61) (1) -- (39) -- -- Conversion of preferred stock to common stock 4,349 43 -- 28,588 -- -- Exercise of stock options 45 1 -- 20 -- -- Accretion of recorded value of Intel warrant -- -- -- -- -- -- Dividend accretion of mandatorily redeemable preferred stock -- -- -- -- -- -- Issuance of common stock to Class L stockholders 8,880 89 -- (89) -- -- Stock issued in connection with termination of management advisory agreement 367 4 -- 4,396 -- -- Stock issued at IPO, net of issuance cost of $11,108 13,693 137 -- 151,756 -- -- Net income -- -- -- -- -- -- ------------------------------------------------------------------------------ Balance as of December 31, 2000 68,438 685 1,250 104,509 -- (1,505) Repayment of amount due from stockholders -- -- -- -- -- 520 Expiration of Intel Warrant -- -- (1,250) 1,250 -- -- Employee stock purchases 922 9 4,117 -- -- Common stock repurchased by Company during the year (63) (1) -- (18) -- -- Exercise of stock options 107 1 -- 185 -- -- Net loss -- -- -- -- -- -- ------------------------------------------------------------------------------ Balance as of December 31, 2001 69,404 $ 694 $ -- $ 110,043 -- $ (985) ============================================================================== Accumulated other Comprehensive Accumulated Income/(Loss) Deficit Total --------------------------------------- Balance as of December 31, 1998 $ 10,478 $ (39,752) $ 113,191 Proceed from common stock issuance at recapitalization, net of issuance cost of $17,982 -- -- 74,018 Sale of common stock and exercise of stock options -- -- 1,671 Capital contribution -- -- 21,225 Conversion of divisional equity to mandatorily redeemable preferred stock -- -- (30,000) Capital redemption at recapitalization -- -- (311,220) Capital contribution by HEI at recapitalization -- -- 19,816 Transfer of divisional equity upon recapitalization -- -- -- Issuance of Intel warrant -- -- 1,250 Accretion of recorded value of Intel warrant -- (260) (260) Dividend accretion of mandatorily redeemable preferred stock -- (3,960) (3,960) Currency translation loss (1,309) -- (1,309) Net loss -- (7,308) (7,308) --------------------------------------- Balance as of December 31, 1999 9,169 (51,280) (122,886) Repayment of amount due from stockholders 185 Sale of common stock -- -- 624 Common stock repurchased by Company during the year -- (40) Conversion of preferred stock to common stock -- -- 28,631 Exercise of stock options -- -- 21 Accretion of recorded value of Intel warrant -- (990) (990) Dividend accretion of mandatorily redeemable preferred stock -- (8,197) (8,197) Issuance of common stock to Class L
36 stockholders -- -- -- Stock issued in connection with termination of management advisory agreement -- -- 4,400 Stock issued at IPO, net of issuance cost of $11,108 -- -- 151,893 Net income -- 12,056 12,056 --------------------------------------- Balance as of December 31, 2000 9,169 (48,411) 65,697 Repayment of amount due from stockholders -- -- 520 Expiration of Intel Warrant -- -- -- Employee stock purchases -- -- 4,126 Common stock repurchased by Company during the year -- -- (19) Exercise of stock options -- -- 186 Net loss -- (93,736) (93,736) --------------------------------------- Balance as of December 31, 2001 $ 9,169 $ (142,147) $(23,226) =======================================
The accompanying notes are an integral part of these financial statements. 37 ChipPAC, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
For the Year Ended December 31, 2001 2000 1999 --------- --------- --------- Cash flows from operating activities: Net income (loss) $ (93,736) $ 12,056 $ (7,308) Adjustments to reconcile net income (loss) to net Cash provided by (used in) operating activities: Depreciation and amortization 59,909 45,049 56,701 Deferred tax 1,636 2,029 (3,049) Write down of impaired assets 34,688 -- -- Non-operating extraordinary loss on early debt extinguishment -- 2,390 1,373 Non-cash termination fees -- 4,400 -- Foreign currency gains (187) (2,168) (1,224) (Gain) loss on sale of equipment (1) (93) (282) Changes in assets and liabilities: Accounts receivable 13,870 (3,519) 6 Inventories 8,769 (155) (5,731) Prepaid expenses and other current assets 2,205 (4,334) (2,906) Other assets (3,290) (14,048) 3,317 Advances to affiliates -- -- (7,424) Accounts payable (23,618) (2,499) (11,615) Accrued expenses and other current liabilities (11,919) 1,859 20,021 Other long-term liabilities (510) 3,297 3,279 --------- --------- --------- Net cash provided by (used in) operating activities (12,184) 46,214 45,932 --------- --------- --------- Cash flows from investing activities: Acquisition of property and equipment (46,392) (93,174) (57,856) Proceeds from sale of equipment 965 17,549 1,347 Malaysian acquisition, net of cash and cash equivalents acquired (7,399) (54,835) -- --------- --------- --------- Net cash used in investing activities (52,826) (130,460) (56,509) --------- --------- --------- Cash flows from financing activities: Advances to affiliates -- (249) (4,430) Proceeds from revolving loans 84,633 45,600 1,169 Repayment of revolving loans (49,234) (37,800) (19,469) Net proceeds from long term debt 74,565 63,660 285,631 Capital redemption at recapitalization -- -- (311,220) Capital contribution by HEI at recapitalization -- -- 19,816 Repayment of long-term debt (28,857) (73,460) (133,615) Debt issue amortization 2,112 1,950 774 Payment made to extinguish debt early -- -- (1,373) Dividends paid -- -- (9,435) Net proceeds from common stock issuance at recapitalization -- -- 74,018 Net proceeds from preferred stock issuance -- -- 50,000 Net proceeds from sale of stock to management -- -- 1,671 Repayment of notes from stockholders 520 -- -- Proceeds from common stock issuance 4,312 152,578 -- Repurchase of common stock (19) (40) --
The accompanying notes are an integral part of these financial statements. 38 ChipPAC, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS-Continued (In thousands)
For the Year Ended December 31, 2001 2000 1999 -------- -------- -------- Redemption of Class B preferred stock -- (79,310) -- Contributions to paid in capital -- -- 20,750 -------- -------- -------- Net cash provided by (used in) financing activities 88,032 70,979 (26,487) -------- -------- -------- Effect on cash from changes in exchange rates -- -- 414 -------- -------- -------- Net increase (decrease) in cash 23,022 (13,267) (36,650) Cash and cash equivalents at beginning of year 18,850 32,117 68,767 -------- -------- -------- Cash and cash equivalents at end of year $ 41,872 $ 18,850 $ 32,117 ======== ======== ======== Supplemental disclosure of noncash investing and financing activities Dividend declared and accreted $ -- $ (8,197) $ (3,960) ======== ======== ======== Accretion of recorded value of Intel warrant $ -- $ (990) $ (260) ======== ======== ======== Conversion of HEA equity to preferred stock $ -- $ -- $ 30,000 ======== ======== ======== Contribution of non-cash capital $ -- $ -- $ 475 ======== ======== ======== Sale of common stock for stockholder notes $ -- $ 562 $ 1,128 ======== ======== ======== Supplemental disclosure of cash flow information Income taxes paid in cash $ 666 $ 4,011 $ 1,442 ======== ======== ======== Interest paid in cash $ 33,659 $ 36,865 $ 12,400 ======== ======== ========
The accompanying notes are an integral part of these financial statements. 39 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: Business, Recapitalization and Basis of Presentation Business and Organization ChipPAC, Inc. and its subsidiaries (the "Company" or "ChipPAC"), provide packaging and testing services to the semiconductor industry, with product and service offerings in communications, computing and multi-applications end markets. The Company packages and tests integrated circuits from wafers provided by its customers. The Company markets its services worldwide, with emphasis on the North American market. The Company's packaging and testing operations are located in the Republic of Korea ("South Korea" or "Korea"), the People's Republic of China ("China") and Malaysia. Recapitalization Prior to August 5, 1999, the Company represented the combination of four business units of Hyundai Electronics Industries Co., Ltd. ("HEI") which operated collectively as HEI's worldwide packaging and testing operations. These four business units historically consisted of the Assembly and Test Division of HEI, Hyundai Electronics Co. (Shanghai) Ltd. ("HECS"), and the Assembly and Test Division of Hyundai Electronics America ("HEA"), a majority owned subsidiary of HEI and ChipPAC, Inc. (CPI) which was owned by HEA. Sales and marketing services were primarily performed by the Assembly and Test Division of HEA. Packaging and testing services were performed by HECS and the Assembly and Test Division of HEI. On August 5, 1999, affiliates of Bain Capital, Inc. and SXI Group LLC, a portfolio concern of Citicorp Venture Capital, Ltd., which we refer to collectively as the "Equity Investors," and management acquired a controlling interest in the Company from HEI and Hyundai Electronics America through a series of transactions, including a merger into ChipPAC, Inc. of a special purpose corporation organized by the Equity Investors. The merger was structured to be accounted for as a recapitalization. Specifically: . the Equity Investors and other parties, including members of our management, invested $92.0 million to acquire common stock of ChipPAC, Inc. which represented approximately 90.2% of its common stock outstanding immediately following the recapitalization; . the prior stockholders of ChipPAC, Inc. retained a portion of their common stock in ChipPAC, Inc. equal to $10.0 million, or approximately 9.8% of ChipPAC, Inc.'s common stock outstanding immediately following the recapitalization; and . the prior stockholders received as consideration for the remainder of their common stock (i) an aggregate of $384.0 million in cash and (ii) mandatorily redeemable convertible preferred stock payable for up to an aggregate of $70.0 million. Net payment to Hyundai of $384.0 million, included capital redemption of $311.0 million and debt retirement of $133.0 million, offset by Hyundai investment of $40.0 million in mandatorily redeemable preferred stock, and a capital contribution of $20.0 million. After completion of the recapitalization, the balance of divisional equity of $0.2 million was transferred to additional paid in capital. 40 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued Basis of Presentation The financial statements for the period subsequent to the recapitalization and at December 31, 2001, 2000 and 1999, have been prepared on a consolidated basis. The consolidated financial statements include the accounts of ChipPAC, Inc. and its majority controlled and owned subsidiaries. All significant intercompany balances have been eliminated on consolidation. Prior to the recapitalization, the Company prepared it's comparative financial statements on a combined basis. Certain prior period balances have been reclassified to conform to the current period presentation. Note 2: Summary of Significant Accounting Policies Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenue and expenses in the financial statements and accompanying notes. Significant estimates made by management include: the useful lives of property; plant and equipment and intangible assets as well as future cash flows to be generated by those assets; revenue reductions relating to customer programs and incentive offerings; allowances for doubtful accounts, customer returns and deferred tax assets; inventory realizability and contingent liabilities, among others. Actual results could differ from the estimates, and such differences may be material to the consolidated financial statements. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Financial Instruments The amounts reported for cash and cash equivalents, accounts receivable, certain other assets, accounts payable, certain accrued and other liabilities, and short-term and long-term debt approximate fair value due to their short maturities or market interest rates. Comprehensive Income (Loss) Statement of Financial Accounting Standard No. 130 "Reporting Comprehensive Income" ("SAFS No. 130") establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income (loss) includes all changes in equity during a period from transactions and events from non owner sources. In the year ended December 31, 2001 and 2000, comprehensive income (loss) approximated net income (loss). In the year ended December 31, 1999, comprehensive income (loss) was ($8.6) million. Inventories Inventories are stated at the lower of cost (computed using the first-in, first-out method) or market value. The Company does not take ownership of its customer supplied semiconductors. The risk of loss associated with the customer supplied semiconductors remains with the customer. These customer supplied semiconductors are not included as part of the Company's inventories. 41 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued Property, Plant and Equipment Property, plant and equipment are recorded at cost. The Company uses the straight-line method to depreciate machinery and equipment over their estimated useful lives from three to eight years. Building facilities and building improvements located in the Shanghai, China facilities are depreciated over 20 years. Building facilities and building improvements in the Kuala Lumpur, Malaysia facilities are depreciated over 25 and 17 years, respectively. Land use rights in Shanghai, China and Kuala Lumpur, Malaysia are amortized over 50 years. Leasehold improvements are amortized over the shorter of the asset life or the remaining lease term. Intangibles Intangibles are amortized over their useful lives on a straight-line basis over a period of three to seven years. Long-Lived Assets Long-lived assets held by the Company are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of carrying amounts to future net cash flows an asset is expected to generate, if an asset is considered to be impaired, the impairment to be recognized is measured by the amount to which the carrying amount of the assets exceeds the fair value of the asset. Concentration of Credit Risk and Major Customers Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of trade accounts receivable and cash and cash equivalents. The Company's customers are comprised of companies in the semiconductor industry located primarily in the United States of America. Credit risk with respect to the Company's trade receivables is mitigated by selling to well established companies, performing ongoing credit evaluations and maintaining frequent contact with customers. The allowance for doubtful accounts is based upon the expected collectability of the Company's accounts receivable. At December 31, 2001, three customers accounted for 19%, 12% and 11% of the outstanding trade receivables. At December 31, 2000, three customers accounted for 18%, 16% and 11% of the outstanding trade receivables. Loss of or default by these customers could have an adverse effect upon the Company's financial position, results of operations and cash flows. Cash and cash equivalents are deposited with banks in the United States of America, South Korea, China, and Malaysia. Deposits in these banks may exceed the amount of insurance provided on such deposits; however, the Company is exposed to loss only to the extent of the amount of cash and cash equivalents reflected on its balance sheets. The Company has not experienced any losses to date on its bank cash deposits. Revenue Recognition The Company recognizes revenue, net of rebates and discounts, upon shipment of packaged semiconductors to its customers on completion of the services. The Company does not take ownership of customer supplied semiconductors as these materials are sent to the Company on a consignment basis. Accordingly, the customer supplied materials are not reflected in revenue or in cost of revenue. Research and Development Costs Research and development costs are charged to expense as incurred. 42 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued Accounting for Income Taxes The Company accounts for deferred income taxes using the liability method whereby deferred tax assets and liabilities are recorded for temporary differences between amounts reported in the financial statements and amounts that are or would have been reported had the combined companies filed separate income tax returns. A valuation allowance is provided for deferred tax assets when management cannot conclude, based on the available evidence, that it is more likely than not that all or a portion of the deferred tax assets will be realized through future operations. The provision for income taxes represents taxes that are or would have been payable for the current period, plus the net change in deferred tax amounts. Computation of Net Income per Share of Common Stock Basic net income available to common stockholders per share of common stock is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share of common stock is computed using the weighted-average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options and convertible subordinated note. Foreign Exchange Contracts In the ordinary course of business the Company may enter into foreign exchange contracts as one way to mitigate the effect of foreign currency movements associated with its operations. The contracts entered into require the purchase of Korean Won or Japanese Yen and the delivery of U.S. Dollars, and generally have maturities which do not exceed three months. Because the contracts entered into to date have not qualified as hedges under generally accepted accounting principles in the United States of America, the gains and losses from these contracts have been recorded as foreign currency gains and losses in the period in which the exchange rate changed. There were no deferred gains or losses at December 31, 2001 and 2000. At December 31, 2001 and 2000, the Company had no outstanding forward contracts and accordingly, no gains and losses were recorded in the years then ended. Foreign Currency Translation Effective October 1999, upon completion of the recapitalization, the Company determined that the functional currency of its foreign operations is the U.S. dollar as such gains and losses resulting from translation from local currencies to the U.S. dollar are included in determining net income or loss for the period. Previously, the Company's functional currencies of its foreign operations were the respective local currencies and the net of the effect of the translation of the accounts of the foreign operations were included in stockholders' equity as a cumulative translation adjustment. Stock-Based Compensation The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and Financial Accounting Standards Board Interpretation No. 44 "Accounting for certain transactions involving stock compensation" in accounting for its employee stock options. Accordingly, compensation for stock options is measured by the excess, if any, of the fair market value of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. The Company has adopted the disclosure and pro-forma requirements of SFAS No. 123, "Accounting for Stock-Based Compensation". 43 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued Recent Accounting Pronouncements In July 2001, FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting. The use of the pooling-of-interest method of accounting is no longer allowed. SFAS No. 142 requires that goodwill and other indefinite life intangible assets will no longer be amortized but shall be reviewed and tested annually for impairment. SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001, and early adoption is permitted for companies with a fiscal year beginning after March 15, 2001. The Company expects that the adoption of SFAS No. 141 and 142 on January 1, 2002, will not have a material effect on its financial statements. In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of" and the accounting and reporting provision of Accounting Principles Board ("APB") No. 30, "Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 addresses financial accounting and reporting for impairment or disposal of long-lived assets including amortizable intangibles and is effective for fiscal years beginning December 15, 2001 as well as interim periods within those fiscal years. SFAS No. 144 does not apply to the impairment of goodwill and non-amortizable intangibles. The Company is currently reviewing this statement to determine its effect on its financial position and results of operations. Note 3: Acquisition of Malaysian Business On June 30, 2000, the Company consummated the acquisition of Intersil's packaging and test operations located in Kuala Lumpur, Malaysia along with related intellectual property for approximately $71.5 million in cash and preferred stock as described below, the Company agreed to pay an additional purchase price if certain performance criteria were met. In connection with the acquisition, the Company entered into a five-year supply agreement with Intersil to provide Intersil assembly and test services on an exclusive basis. The acquisition has been accounted for using purchase accounting. Under purchase accounting, the total purchase price of the Malaysian business is allocated to the acquired assets and liabilities based on their relative fair values as of the closing date of the acquisition. The purchase price of $71.5 million represents the total of the cash consideration (including direct costs of the acquisition) and the estimated fair value of the Class C preferred stock exchanged for the whole of the issued shares of the Malaysian business and certain intellectual property associated with it. 44 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued The terms of the acquisition of the Malaysian business requires the Company to pay until June 30, 2003 additional contingent incentive payments to Intersil based on the achievement of milestones with respect to the transfer of the seller's packaging business, currently subcontracted by Intersil to a third party, to us. The Company will record these contingent payments as additional purchase price if and when they are earned and paid on a quarterly basis. In the event that Intersil were to achieve all the milestones, Intersil would receive an additional sum of approximately $17.9 million in the aggregate. For the years ended December 31, 2001 and 2000, $7.5 million and $0.4 million, respectively, were paid for a cumulative total of $7.9 million. These payments increased the effective purchase price and were allocated to non-current assets. Additionally, $2.4 million of other purchase price adjustments were recorded based on the difference between the final closing balance sheet and the estimated closing balance sheet of the Malaysian business and deferred tax of $3.1 million on all of these adjustments. This resulted in a further increase in non-current assets. The amount and components of the purchase price including additional contingent incentive payments along with the allocation of the purchase price to assets purchased and liabilities assumed as of December 31, 2001 were as follows: (in millions) Purchase Price: Cash consideration .............................................. $ 62.8 Estimated fair value of Class C preferred stock ................. 15.8 Deferred taxes .................................................. 3.1 Expenses ........................................................ 5.0 Less: payment due from Intersil ................................. (1.8) ------- $ 84.9 ======= Allocation of Purchase Price: Land and buildings ............................................. $ 19.3 Plant and equipment ............................................ 66.4 Intellectual property .......................................... 14.2 Restructuring accrual .......................................... (7.4) Deferred taxes ................................................. (4.1) Net other assets and liabilities ............................... (3.5) ------- $ 84.9 ======= In June 2000, in connection with the acquisition of the Malaysian business, the Company authorized and issued 8,750 shares of non-voting Class C-1 and 8,750 shares of Class C-2 mandatorily redeemable preferred stock having an aggregate liquidation preference of $1,000 per share. Dividends on the Class C mandatorily redeemable preferred stock accrued at a rate of 5.0% per annum. In accordance with their terms, the shares of Class C preferred stock were converted into shares of Class A common stock on August 8, 2000 upon the Company's initial public offering. While the shares had a liquidation value of $17.5 million, their fair value was determined to be $15.8 million upon issuance. 45 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued There is no goodwill arising from the acquisition of the Malaysian business. The fair value of total assets and liabilities exceeded the purchase price by $56.2 million as of July 1, 2000. This amount has been allocated in full to non-current assets as summarized below:
Excess of Fair Total Estimated Value of Additional Fair Acquired Net Purchase Adjusted Non-current asset Value Amounts Over Cost Price Fair Value - ----------------- ----- ---------------- ---------- ---------- (in millions) Land and buildings .............. $ 27.9 $ (11.1) $ 2.5 $ 19.3 Plant and equipment ............. 93.9 (36.9) 9.4 66.4 Intellectual property ........... 20.9 (8.2) 1.5 14.2 -------- ------- ------- ------- $ 142.7 $ (56.2) $ 13.4 $ 99.9 ======== ======= ======= =======
Intellectual property acquired along with the Malaysian business primarily consists of trade secrets and patents. The estimated average useful life of these assets are between five and nine years. An accrual of $7.4 million was established for expected costs of restructuring the Malaysian business. For the years ended December 31, 2001 and 2000, $2.3 million and $4.9 million of these non-recurring costs have been paid in connection with our factory reorganization, product discontinuance and employee related costs. As of December 31, 2001, a total of $0.2 million remains for completion of the purchase activities. We began formulating exit plans and termination data during our due diligence relating to the acquisition of the Malaysian business. The accrual was originally comprised of $5.0 million for involuntary termination benefits and $2.4 million of other exit activities. Actual involuntary termination benefits and other exit costs amounted to $7.0 million and $0.2 million, respectively. The projected number of planned reductions in head count as a result of this planned restructuring was 380 employees, with an actual reduction of 373 employees. All restructuring activities were completed in the year ended December 31, 2001, and there are no unresolved contingencies or purchase price allocation issues The results of operations of the Malaysian business have been included within the Company's results of operations for periods subsequent to June 30, 2000. Set forth below is the unaudited pro forma combined summary of operations of the Company for the years ended December 31, 2000 and 1999, as if the acquisition had been made on January 1, 1999 (in thousands, except for per share amounts). 46 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued Pro Forma Disclosure December 31, 2000 1999 -------------------------- (unaudited) (unaudited) Net revenue $536,326 $477,394 Income before extraordinary item 9,165 7,009 Net income 6,775 6,749 Earnings per share Basic $ 0.10 $ 0.13 -------- -------- Diluted $ 0.10 $ 0.12 -------- -------- Shares used in per share calculation: Basic 68,367 54,002 -------- -------- Diluted 69,553 54,601 -------- -------- Intersil assigned to the Company, patents, copyrights, and technical information used exclusively in or associated with the Malaysian business. Furthermore, Intersil granted a worldwide, non-exclusive, royalty-free license under other Intersil patents, copyright and technical information, to the Company, which is also used in or related to the operation of the Malaysian business. This license is perpetual and irrevocable. Any intellectual property rights in the bonding diagrams, test programs, maskworks and test boards uniquely related to the Intersil products for which the Company will provide packaging and test services under the supply agreement with Intersil are licensed to it only for use in providing those services. Note 4: Termination of Advisory Agreements At the time of the 1999 recapitalization, the Company entered into two advisory agreements with certain Equity Investors under which the Equity Investors provided financial, advisory and consulting services to the Company. Each advisory agreement was to remain in effect for an initial term of ten years. Expenses related to these contracts were recorded as selling, general and administrative expenses. The Company agreed to terminate the advisory agreements with the Equity Investors upon the closing of the initial public offering for a one-time aggregate payment of $8.0 million consisting of a $3.6 million cash payment and the issuance of $4.4 million of the Company's Class A common stock at a price per share equal to the initial public offering price of $12.00 per share. There were no active consulting projects involving the Equity Investors at the time the agreements were cancelled. The one-time charge to income of $8.0 million was classified as an other expense and was made in the third quarter of fiscal 2000 for the termination of these agreements. 47 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued Note 5: Risks and Uncertainties Industry The Company's business involves certain risks and uncertainties. Factors that could affect the Company's future operating results and cause actual results to vary materially from expectations include, but are not limited to, dependence on a cyclical industry that is characterized by rapid technological changes, fluctuations in end-user demands, evolving industry standards, competitive pricing and declines in average selling prices, risks associated with foreign currencies, and enforcement of intellectual property rights. Additionally, the market in which the Company operates is very competitive. As a result of these industry and market characteristics, key elements of competition in the independent semiconductor packaging market include breadth of packaging offerings, time-to-market, technical competence, design services, quality, production yields, reliability of customer service and price. The Company reduced the concentration of its customers that make up more than 10.0% of sales from two customers in the year 2000 accounting for 47.0% of total revenue, to four customers accounting for 61.3% of total revenue in 2001. As a result, any decommitment from any major customer for products could have an adverse impact on the Company's financial position, results of operations and cash flows. In 2001, 2000 and 1999, the Company had four, two and one customers, over 10.0% of sales, respectively. These customers were as follows: Year ended December 31, ----------------------- Customer 2001 2000 1999 - -------- ---- ---- ---- Intersil 20.2% * - Intel 18.3% 34.4% 50.8% LSI Logic 12.8% 12.6% * Atmel 10.0% * * * Denotes less than 10% Other South Korean, Chinese, and Malaysian foreign currency exchange regulations may place restrictions on the flow of foreign funds into and out of those countries. The Company is required to comply with these regulations when entering into transactions in foreign currencies in South Korea, China and Malaysia. As of December 31, 2001 and 2000, there were no restrictions on foreign funds flow. The Company procures materials from local vendors in the ordinary course of business. Three vendors in South Korea supply approximately 40.0% of the Company's component parts used in performing packaging services. Management believes that the Company has sufficient suppliers such that the loss of these concentrated suppliers would not have a material impact on the Company's combined financial position, results of operations or cash flows. Note 6: Selected Balance Sheet Accounts The components of inventories were as follows (in thousands): December 31, 2001 2000 ------- ------- Raw materials .......................... $7,949 $16,935 Work in process ........................ 3,080 2,935 Finished goods ......................... 1,452 1,380 ------- ------- 12,481 21,250 ======= ======= 48 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued Property, plant and equipment were comprised of the following (in thousands): December 31, 2001 2000 --------- --------- Land use rights .................................... $ 11,969 $ 11,089 Buildings and improvements ......................... 63,258 58,351 Equipment .......................................... 457,171 496,722 --------- --------- 532,398 566,162 Less accumulated depreciation and amortization ..... (227,748) (231,429) --------- --------- $ 304,650 $ 334,733 ========= ========= Land use rights represent payments made to secure, on a fully paid-up basis, the use of the property where the Company's facilities are located in Shanghai, China and Kuala Lumpur, Malaysia for a period of 50 and 99 years, respectively. Effective January 1, 2000, the Company re-evaluated the estimated useful lives of equipment. Based on the Company's assessment of the data gathered, estimated useful lives of assembly and test product equipment and furniture and fixtures were changed from five years to eight years. Previously, such equipment was depreciated on a straight-line basis over an estimated useful life of five years. The net book values of assembly and test product equipment and furniture and fixtures, as of January 1, 2000, are being depreciated over the remaining useful life, based on eight years from the date such assets were originally placed in service. This change resulted in depreciation expense for the year ended December 31, 2000 being $29.0 million lower than would have been recorded using five-year lives. The following is a proforma disclosure of the effect of this change in depreciable live on the net income of December 31, 2000: (in thousands, except per share amount) Income before extraordinary item, as reported $ 14,446 Change in depreciation due to useful life change from 5 yrs to 8 yrs (29,000) -------- Pro forma loss before extraordinary item (14,554) Extraordinary item - Loss from early extinguishment of debt, net of related income tax benefit (2,390) -------- Pro forma net loss $(16,944) ======== Basic earnings per share: Pro forma loss before extraordinary item $ (0.26) Pro forma net loss $ (0.30) Weighted-average common shares outstanding used in basic earnings per share 57,067 Weighted-average common shares outstanding used in diluted earnings per share 57,067
49 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued Other assets were comprised of the following (in thousands):
December 31, 2001 2000 ------- ------- Deposits ....................................................... $ 1,603 $ 1,393 Long-term employee loans ....................................... 652 2,350 Deferred taxes ................................................. -- 3,712 Debt issuance costs, net of amortization of $7,226 and $5,114... 14,715 11,673 Intangibles cost, net of amortization of $12,015 and $4,764..... 18,038 18,465 Other .......................................................... 155 4,195 ------- ------- $35,163 $41,788 ======= =======
Debt issuance costs of $16.8 million were incurred in 2000 and 1999 raising $300.0 million of debt in connection with the recapitalization and approximately $55.8 million of debt in connection with the Malaysian acquisition, respectively. In 2001, an additional $5.2 million of debt issuance costs were incurred with the issuing of $65.0 million debt. In 2001, a loan loss reserve for executive officers was establised in Q4 2001 in conjuntion with the restructuring and related activities of $1.5 million to reflect the forgiveness of the loans in Q1 2002. Accrued expenses and other liabilities were comprised of the following (in thousands): December 31, 2001 2000 ------- ------- Payroll and related items .................... $ 9,696 $12,556 Interest payable ............................. 10,954 8,768 Customer rebate .............................. - 3,613 Restructuring reserve ........................ 1,632 1,850 Other expenses ............................... 5,556 12,970 ------- ------- $27,838 $39,757 ======= ======= 50 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued NOTE 7: Restructuring, write down of impaired assets and other charges 2001 In the first and fourth quarters of 2001, ChipPAC's management approved restructuring plans to realign its organization and reduce operating costs. These actions were designed to better align ChipPAC's workforce with the decrease in demand and to reduce selling, general, and administrative expenses. These plans were a combination of reductions in force and furloughs. Accordingly, ChipPAC planned to reduce associated employee positions by approximately 554 and 197 worldwide in connection with the first and fourth quarter plans, respectively. Restructuring and related charges of $2.9 million and $3.3 million were expensed during the first and fourth quarters of 2001, respectively. The entire first quarter charge was related to employee separations and furloughs. The fourth quarter charge was comprised of $1.8 million related to employee separations and $1.5 million of loan loss reserves for executive officers loans. Employee separation benefits under each plan were similar and included severance, medical and other benefits. As of December 31, 2001, ChipPAC completed 554 of the planned 751 employee separations and all of the furloughs planned for 2001. ChipPAC expects to substantially complete the initiatives contemplated under the restructuring plans by June 30, 2002 for the estimated amount accrued with no significant differences. Components of accrued restructuring costs and amounts charged for restructuring as of December 31, 2001 were as follows: Adjustments Beginning and December 31, (In thousands) Accrual Expenditures 2001 ------------- ----------- -------------- ------------- Employee separations $ 4,732 $(3,100) $ 1,632 Loan loss reserve 1,500 -- 1,500 ------- ------- ------- $ 6,232 $(3,100) $ 3,132 ======= ======= ======= The Company reviews property, plant and equipment and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company determines whether there has been an impairment by comparing the anticipated undiscounted future net cash flows to be generated by an asset to its carrying value. If an asset is considered impaired, the asset is written down to fair value which is either determined based on discounted cash flows or appraised or estimated values, depending on the nature of the asset. During the year ended December 31, 2001, the Company wrote down impaired assets by $34.7 million. The asset write down relates primarily to the Company's manufacturing assets in the assembly and test facilities in South Korea and Malaysia. The Company determined that due to excess capacity the future expected cash flows related to equipment for certain package types will not be sufficient to recover the carrying value of the manufacturing equipment in the facility for those package types. The carrying values of these assets were written down to the estimated fair value and will continue to be depreciated over their remaining useful lives. 1999 In connection with the recapitalization (See Note 1), the company made a one-time change of control payment to unionized Korean employees of $11.8 million. Note 8: Dividends Accreted 2001 2000 ------ ------ (in thousands) Preferred Stock, Class A ("Intel Preferred Stock") ....... $ -- $ 620 Preferred Stock, Class B ("Hyundai Preferred Stock") ..... -- 5,756 Preferred Stock, Class C ("Intersil Preferred Stock") .... -- 1,821 ------ ------ $ -- $8,197 ====== ====== Dividends on the Intel Preferred Stock were accrued on a daily basis at a rate of 10.0% per annum. Accumulated and unpaid dividends as of December 31, 1999 were capitalized as part of Mandatorily Redeemable Preferred Stock. Total accreted dividends and liquidation value of $11.0 million were converted into 2,800,438 shares of common stock at the initial public offering. Dividends on the Hyundai Preferred Stock were accrued on a daily basis at a rate of 12.5% per annum. Dividends were recorded as accumulated and unpaid dividends as part of Mandatorily Redeemable Preferred Stock. Total dividends and liquidation value of $79.3 million were paid in full through the proceeds of the initial public offering. Dividends on the Intersil Preferred Stock were accrued on a daily basis at a rate of 5.0% per annum. Dividends were recorded as accumulated and unpaid dividends as part of Mandatorily Redeemable Preferred Stock. Total dividends and liquidation value of $17.6 million were converted into 1,548,816 shares of common stock at the initial public offering. 51 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued Note 9: Earnings per share Statement of Accounting Standards No. 128 ("SFAS 128") requires a reconciliation of the numerators and denominators of the basic and diluted per share computations. Basic earnings per share ("EPS") is computed by dividing net income available to stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted EPS is computed using the weighted average number of shares of common stock and all potentially dilutive shares of common stock outstanding during the period. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options and the if-converted method is used for determining the number of shares assumed issued from the conversion of the convertible subordinated notes. As of December 31, 2001, there were options outstanding to purchase 7.1 million shares of Class A common stock with a weighted average exercise price of $4.01, which could potentially dilute basic earnings per share in the future, but which were not included in diluted earnings per share as their effect was antidilutive. The Company also has outstanding the $50.0 million convertible subordinated notes, which are convertible into approximately 5.0 million shares of Class A common stock but which were not included in diluted basic earnings per share as their effect was also antidilutive. Had these options and convertible subordinated notes been included in the diluted earnings per share counts, the total of weighted average shares of Class A common stock would be 70,194,000 shares. Following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the periods presented below.
December 31, 2001 December 31, 2000 December 31, 1999 Per-Share Per-Share Per-Share Loss Shares Amount Income Shares Amount Loss Shares Amount ------ ------ ------ ------ ------ ------ ---- ------ ------ (In thousands, except per share amounts) Basic EPS: Income (loss) per share available to common stockholder before extraordinary item ............... $(93,736) 68,878 $ (1.36) $ 5,259 57,067 $ 0.09 $(10,155) 38,935 $ (0.26) Effect of dilutive securities: Stock options and warrants ....... - 1,186 - Diluted EPS: Income (loss) per share available to common stockholder before extraordinary item ............... $(93,736) 68,878 $ (1.36) $ 5,259 58,253 $ 0.09 $(10,155) 38,935 $ (0.26) Basic EPS: Extraordinary item .................. $ - $ - $ 2,390 57,067 $ (0.04) $ 1,373 38,935 $ (0.04) Effect of dilutive securities: Stock options and warrants ....... - 1,186 - Diluted EPS: Extraordinary item .................. $ - $ - $ 2,390 58,253 $ (0.04) $ 1,373 38,935 $ (0.04) Basic EPS: Net Income (loss) per share available to common stockholders . $(93,736) 68,878 $ (1.36) $ 2,869 57,067 $ 0.05 $(11,528) 38,935 $ (0.30) Effects of dilutive securities: Stock options and warrants ....... - 1,186 - - Diluted EPS Net Income (loss) per share available to common stockholders .................. $(93,736) 68,878 $ (1.36) $ 2,869 58,253 $ 0.05 $(11,528) 38,935 $ (0.30)
52 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued Note 10: Segments and Geographic Information The Company is engaged in one industry segment, the packaging and testing of integrated circuits. The following table describes the composition of revenue by product group and test services, as a percentage of total revenue: Year Ended December 31, ------------------- 2001 2000 1999 ----- ----- ----- Laminate ...................... 46.0% 55.8% 68.1% Leaded ........................ 40.2 35.0 29.1 Test .......................... 13.8 9.2 2.8 ----- ----- ----- Total ...................... 100.0% 100.0% 100.0% ===== ===== ===== 53 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued Financial data, summarized by geographic area, were as follows (in thousands):
United States of America Asia Eliminations Consolidated ---------------- ---------- ------------ ------------ Year ended December 31, 2001 Revenue from unaffiliated customers $ 328,641 $ 60 $ - $ 328,701 Revenue from affiliates - 360,221 (360,221) - --------- --------- --------- --------- Total revenue $ 328,641 $ 360,281 $(360,221) $ 328,701 ========= ========= ========= ========= Interest expense $ 37,211 $ 3 $ - $ 37,214 Interest income (451) (237) (688) Depreciation and amortization expense 6,591 53,318 - 59,909 Income tax expense (benefit) 5,052 (2,474) - 2,578 Income (loss) from operations (65,557) 10,328 - (55,229) Identifiable assets $ 408,937 $ 463,326 $(441,548) $ 430,715 ========= ========= ========= ========= Year ended December 31, 2000 Revenue from unaffiliated customers $ 494,282 $ 129 $ - $ 494,411 Revenue from affiliates - 457,609 (457,609) - --------- --------- --------- --------- Total revenue $ 494,282 $ 457,738 $(457,609) $ 494,411 ========= ========= ========= ========= Interest expense $ 39,426 $ 6 $ - $ 39,432 Interest income (383) (460) (843) Depreciation and amortization expense 3,625 41,424 - 46,999 Income tax expense (benefit) (3,276) 6,890 - 3,614 Income (loss) from operations 9,785 52,545 - 62,330 Extraordinary item, net of related income tax benefit 2,390 - - 2,390 Identifiable assets $ 359,560 $ 472,037 $(362,352) $ 469,245 ========= ========= ========= ========= Year ended December 31, 1999 Revenue from unaffiliated customers $ 347,349 $ 17,382 $ - $ 364,731 Revenue from affiliates - 347,000 (336,201) 10,799 --------- --------- --------- --------- Total revenue $ 347,349 $ 364,382 $(336,201) $ 375,530 ========= ========= ========= ========= Interest expense $ 14,484 $ 6,757 $ - $ 21,241 Interest income (747) (2,004) (2,751) Depreciation and amortization expense 2,528 54,947 - 57,475 Income tax expense (benefit) 1,166 772 - 1,938 Income (loss) from operations 4,307 8,312 - 12,619 Extraordinary item, net of related income tax benefit - 1,373 - 1,373 Identifiable assets $ 286,673 $ 371,082 $(314,326) $ 343,429 ========= ========= ========= =========
Revenue from unaffiliated customers is based on the geographic location of each plant's principal place of business. Revenue from affiliated customers is based on the origin of the shipment. Identifiable assets are those assets that can be directly associated with a particular geographic area. In determining each geographic location's income (loss) from operations and identifiable assets, the expenses and assets relating to general corporate activities are included in the amounts for the geographical area where they were incurred, acquired or utilized. 54 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued The Company's sales by geographic location of the customer were as follows: December 31, Region 2001 2000 1999 - ------ ---- ---- ---- USA 92% 83% 89% Asia 6 14 9 Europe 2 3 2 ==== ==== ==== Total 100% 100% 100% ============================= Note 11: Term Debt and Credit Facilities Under the terms of the recapitalization and merger in 1999 all short and long-term debt, loans and leases and other credit facilities existing prior to the recapitalization were terminated at the recapitalization date. To finance part of the recapitalization, the Company borrowed $300.0 million of new debt, comprising $150.0 million of term loans and $150.0 million of senior subordinated notes. The term loans bear interest based on the London Interbank Offered Rate (LIBOR) rate (1.98% at December 31, 2001) plus 2.75% to 4.0% and the senior subordinated notes bear interest at 12.75% per annum. The senior subordinated notes mature on July 21, 2009. If a change of control occurs, the Company may be required to allow holders of the senior subordinated notes to sell the Company their notes at a purchase price of 101.0% of the principal amount of the notes, plus accrued and unpaid interest. Interest is payable semi-annually for the senior subordinated notes and quarterly for the term loans. At December 31, 2001, the Company has a borrowing capacity of $50.0 million for working capital and general corporate purposes under the revolving credit line portion of the senior credit facilities. The revolving credit line under the senior credit facilities matures on July 31, 2005. As of December 31, 2001, the Company maximized borrowings of $50.0 million on the revolving line of credit at a weighted average interest rate of 6.03%. In June 2001, the Company issued $50.0 million of convertible subordinated notes and $15.0 million of senior subordinated notes in a private placement. The convertible subordinated notes bear interest of 8.0% per annum and the notes mature on June 15, 2011. The senior subordinated notes bear interest at 12.75% per annum and mature on August 1, 2009. A majority of these funds were used to pay down the term loans and revolving loans. As of December 31, 2001, our debt consisted of $383.6 million of borrowings, which was comprised of $50.0 million of revolving loans, $118.6 million in term loans, $165.0 million of senior subordinated notes and $50.0 million of convertible subordinated notes. 55 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued The Company's debt instruments require that the Company meet specified financial tests, including, without limitation, a maximum leverage ratio, a minimum interest coverage ratio, minimum fixed charge coverage ratio, a maximum senior leverage ratio, capital expenditure limit and, for 2002 only, a minimum consolidated adjusted EBITDA amount. In conjunction with the Company's $65.0 million private placement in June 2001, the lenders of the Company's senior credit facilities amended the financial tests for the period July 1, 2001 through December 31, 2004. These debt instruments also contain covenants restricting the Company's operations. There were no violations of these covenants through December 31, 2001. On December 31, 2001, these covenants were waived for 2002 and three new covenants were established for 2002: 1) a requirement to raise at least $20 million in junior capital by March 1, 2002, which was fulfilled by the Company through an underwritten public offering of the Company's Class A common stock, completed in January 2002, 2) a minimum EBITDA requirement based on a rolling 12 months ending March 31, 2002, June 30, 2002, September 30, 2002 and December 31, 2002, of $30.0 million, $26.0 million, $32.0 million and $40.0 million, respectively, and 3) a capital expenditures limit of $30 million in 2002 with an exemption for a buyout of existing operating leases. Future maturities of term debt, senior subordinated notes and convertible subordinated notes outstanding at December 31, 2001 were as follows (in thousands): Year Ended December 31, - ----------------------- 2002 .................................................. $ 50,000 2003 .................................................. 15,252 2004 .................................................. 24,752 2005 .................................................. 14,901 2006 .................................................. 63,722 2007 .................................................. -- 2008 .................................................. -- 2009 .................................................. 165,000 2010 .................................................. -- 2011 .................................................. 50,000 -------- $383,627 Less current portion .................................. (50,000) -------- Non current portion ................................... $333,627 ======== Substantially all assets of the ChipPAC consolidated group, with the exception of the two Chinese non-guarantor entities (ChipPAC Shanghai (Shanghai) and ChipPAC Electronic Technology (Shanghai)), have been pledged as collateral under the term debt and revolving credit facilities agreement put in place on August 5, 1999. The indenture governing the 12.75% senior subordinated notes has been fully and unconditionally guaranteed, jointly and severly on a senior subordinated basis by the parent company and the guaranteeing subsidiaries. See Note 21. - Supplemental Financial Statements of Guarantor/Non-Guarantor Entities. On early retirement of certain debt upon the initial public offering and the recapitalization, the Company recorded an extraordinary loss of $2.4 million and $1.4 million, net of related tax benefit, in the years ended December 31, 2000 and 1999, respectively. 56 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued Note 12: Mandatorily Redeemable Preferred Stock Intel Preferred Stock Pursuant to the Intel Stock Purchase Agreement, the Company issued 10,000 shares of Class A 10.0% mandatorily redeemable preferred stock and the Intel warrant to Intel, which is referred to as the Intel Preferred Stock, for $10.0 million in cash. Dividends on the Intel Preferred Stock accrue on a daily basis from the date of issuance at a rate of 10.0% per annum, payable when and as declared by the board of directors; provided, however, that dividends will be paid prior to the payment of any dividends with respect to any of the Company capital stock or equity securities which the Company refers to as junior securities, other than the Hyundai Preferred Stock and the Class C Preferred Stock. All of the Intel Preferred Stock and accreted dividends of $11.0 million were converted to 2,800,438 shares of Class A common stock at the initial public offering. The total dividend accreted in the year ended December 31, 2000 was $0.6 million. Intel Warrant Under the Intel Stock Purchase Agreement, the Company also issued a warrant to Intel, which entitled Intel to purchase $5.0 million of our common stock at $9.60 (20.0% discount off the initial public offering price of $12.00). This warrant expired on February 5, 2001 unexercised. The value of the warrant was included as additional paid in capital during the year ended December 31, 2001. Hyundai Preferred Stock In connection with the recapitalization, the Company issued to HEI and Hyundai Electronics America ("HEA") 70,000 shares of Class B preferred stock, referred to as the Hyundai Preferred Stock, which had an initial aggregate liquidation preference of $70.0 million. Dividends on the Hyundai Preferred Stock accrued on a daily basis from August 5, 1999 at a rate of 12.5% per annum. The Hyundai Preferred Stock, including all accreted dividends totaling $79.3 million, was fully redeemed with proceeds from the initial public offering. Total dividend accreted for the year ended December 31, 2000 was $5.8 million. In addition, HEI could have received up to an additional $55.0 million in cash during the four-year period beginning January 1, 1999 if the Company had exceeded certain levels of EBITDA as set forth in the recapitalization agreement. HEI was entitled to receive 33.3% of the amount by which the EBITDA (defined in the recapitalization agreement as net income before interest, taxes, depreciation, amortization, extraordinary items and advisory fees) exceeded $116.5 million, $171.3 million, $198.5 million and $231.8 million, respectively, in each of the first four years following the recapitalization. In the event the final $20.0 million of such $55.0 million in cash was required to be paid to HEI, it would have been paid by the mandatory redemption of an equal amount of Hyundai Preferred Stock. No payments were made to HEI in the years ended December 31, 2000 and 1999 under these terms, and this right expired with the redemption of the Hyundai Preferred Stock. 57 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued Class C Preferred Stock In connection with our acquisition of the Malaysian business, the Company authorized and issued shares of non-voting Class C mandatorily redeemable preferred stock having an aggregate liquidation preference of $17.5 million. Dividends on the Class C mandatorily redeemable preferred stock accrued at a rate of 5.0% per annum. Total liquidation value and accreted dividends of $17.6 million were converted into 1,548,815 shares of Class A common stock at the initial public offering. Note 13: Common Stock and Stockholders' and Equity A portion of certain shares sold by the Company are subject to a right of repurchase by the Company subject to vesting, which is generally over a four year period from the earlier of grant date or employee hire date, as applicable until vesting is complete. At December 31, 2001, there were 505,629 shares subject to repurchase. The Company currently has authorized Class A and B common stock. There are 250,000,000, $0.01 par value, shares authorized of each Class A and Class B common stock. At December 31, 2001 and 2000 there were 69,404,000 and 68,438,000 shares, respectively, of Class A common stock issued and outstanding. There were no shares of Class B common issued or outstanding at December 31, 2001, or 2000. On June 13, 2000 the Company was reincorporated in Delaware ("ChipPAC Delaware"). In order to effect the reincorporation, ChipPAC, Inc., a California corporation ("ChipPAC California"), was merged with and into ChipPAC Delaware and as a result of which ChipPAC California ceased to exist. The Company operates its business as ChipPAC, Inc. The merger occurred immediately prior to the effectiveness of the Company's Registration Statement on Form S-1. In the merger, each outstanding share of ChipPAC California Class A common stock was converted into one share of ChipPAC Delaware Class A common stock. Each outstanding share of ChipPAC California Class B common stock was converted into one share of ChipPAC Delaware Class B common stock. Each outstanding share of ChipPAC California Class L common stock was converted into and became one share of ChipPAC Delaware Class A common stock plus an additional number of shares of ChipPAC Delaware Class A common stock which was determined by dividing a preferential distribution, based in part on the original cost of such share plus an amount which accrued daily at a rate of 12.0% per annum, compounded quarterly, by the per share price of the ChipPAC Delaware Class A common stock in the initial public offering. As a result, Class L common stockholders received 8,880,507 shares of Class A common stock. The Company currently has authorized 10,000,000 shares of preferred stock, par value $0.01, which may be issued in one or more series. At December 31, 2001 and 2000, there were no shares of preferred stock outstanding. At December 31, 1999 there were 10,000 shares of Class A preferred stock and 70,000 shares of Class B preferred stock outstanding. 58 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued Initial Public Offering In July 2000, a 0.38098771 for 1 reverse stock split was made on the Company's common stock. All share and per share information presented herein has been restated to give effect to the stock split. On August 8, 2000, the Securities and Exchange Commission declared effective the Registration Statement on Form S-1 (Registration No. 333-39428) relating to the initial public offering of the Company's Class A common stock. In connection with the closing of the initial public offering, the Company issued 10,000,000 shares of Class A Common Stock for gross proceeds of $120.0 million. The Company concurrently completed the private placement described below. The total proceeds from the offering and the concurrent private placement, net of issuance costs, were $135.0 million. On August 18, 2000 in connection with the underwriters' exercise of their over-allotment option to purchase additional shares of our Class A common stock, an additional 1,500,000 shares of Class A common stock for gross proceeds of $18.0 million were issued by the Company. Total proceeds from the issuance of the additional shares, net of issuance costs, was $16.9 million. The net proceeds, amounting to $151.8 million, have been used to redeem in full the Class B mandatorily redeemable preferred stock of $79.3 million and to repay debt of $64.2 million. In connection with the closing of the initial public offering, all outstanding shares of Class A and Class C mandatorily redeemable preferred stock were automatically converted into an aggregate of 4,349,254 shares of Class A common stock. Qualcomm Private Placement On July 13, 2000, Qualcomm agreed to enter into a three-year supply agreement with the Company under which the Company will provide packaging and test services for integrated circuit devices for Qualcomm and Qualcomm agreed to purchase $25.0 million of our Class A common stock at a purchase price per share of $11.40 (95.0% of the initial public offering price) in a private placement that occurred concurrently with the closing of the Company's initial public offering. Based on the initial public offering price of $12.00 per share, Qualcomm purchased 2,192,983 shares of Class A Common Stock. Note 14: Termination of Advisory Agreements At the time of our 1999 recapitalization, we entered into advisory agreements with affiliates of Bain Capital, Inc. and SXI Group LLC, a portfolio concern of Citicorp Venture Capital Ltd., (our Equity Investors), under which the Equity Investors provided financial, advisory and consulting services to us. Each advisory agreement was to remain in effect for an initial term of ten years. We agreed to terminate the advisory agreements with the Equity Investors upon the closing of the initial public offering for a one-time aggregate payment of $8.0 million consisting of a $3.6 million cash payment and the issuance of $4.4 million of our Class A common stock at a price per share equal to the initial public offering price. We recorded a one-time charge to income of $8.0 million in the third quarter of fiscal 2000 for the termination of these agreements. 59 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued Note 15: Commitments Intel Materials Agreement On August 5, 1999, the Company and Intel entered into the Intel Materials Agreement pursuant to which Intel will outsource to the Company a portion of its semiconductor packaging needs. In return, the Company will provide Intel with rebates based upon the volume of packaging services outsourced to the Company. Rebates are deducted from revenue and accrued as current liabilities when the sale is made. The rebate percentage applied in computing the accrual is based on projected total sales and the relevant rebate percentages for the periods stated in the agreement. The Intel Materials Agreement covers semiconductor packaging services for which Intel has an ongoing purchasing requirement and for which the Company is a qualified source and where costs, yields and quality are equal to that of the same services provided by other semiconductor packaging companies. The Intel Materials Agreement also provides that Intel will not enter into other agreements for packaging services that contain provisions relating to competitive pricing and volume guarantees similar to those contained in the Intel Materials Agreement. This restriction only applies to agreements with semiconductor packaging companies that (i) are qualified to provide packaging services to Intel and (ii) provide the same type of packaging services provided by the Company. The Intel Materials Agreement also obligates the Company to first offer to Intel rights to use intellectual property related to certain new packaging services technology developed by the Company. The agreement expired on December 31, 2001 and was extended to March 31, 2002. For the year ended December 31, 2001, there was no rebate amount earned by nor paid to Intel. For the years ended December 31, 2000 and 1999, Intel earned and was paid $3.6 million for both years. The rebates were accrued when earned and were paid in January following each of December 31, 2000 and 1999. The Company's executive offices in the United States of America were leased from HEA until May 2001, thereafter, the Company's executive offices were moved to Fremont, California and are leased from an unrelated party. The Company's facilities in Korea are leased from HEI, under non-cancelable operating lease arrangements through 2004 with an option to extend to 2009. Rent expense in the years ended December 31, 2001, 2000, and 1999 was $6.4 million, $5.2 million, and $4.9 million respectively. Future annual minimum lease payments under noncancellable operating leases that have initial or remaining noncancellable lease terms in excess of one year at December 31, 2001 were as follows (in thousands): Years Ended December 31, - ----------------------- 2002 ........................................................ $16,790 2003 ........................................................ 15,255 2004 ........................................................ 8,435 2005 ........................................................ 6,760 2006 ........................................................ 7,000 Thereafter .................................................. 31,196 ------- $85,436 ======= 60 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued Note 16: Related Party Transactions
(In thousands) December 31, 2001 2000 1999 ---------------------------------------- Revenue from sale of packaging and testing services to HEI group $4,623 $31,500 $10,800 Reimbursement for plating services provided to HEI group including margin of $2,040, $4,236 and $2,734, respectively 6,392 9,300 8,100 Accounts receivable at year end for sales and plating services to HEI group 417 814 11,700 Accounts payable to HEI group for common area use of facilities and utilities. 1,370 - -
During the years ended December 31, 2001, 2000 and 1999, HEA charged $0.3 million, $0.7 million and $0.8 million, respectively to the Company for rent and building related taxes, insurance, and maintenance. At June 30, 1998, Hyundai Information Technology ("HIT") entered into a three-year agreement with CPK to provide information technology services. This agreement was extended to June 2002. For the years ended December 31, 2001, 2000 and 1999, HIT charged CPK $0.9 million, $1.6 million and $2.3 million, respectively. During 1998, the Company entered into an agreement with HIT for the installation of a significant portion of a modular software system. The installation of this portion of the software system was completed in February 1999. For the year ended December 31, 1999, the Company incurred charges of $2.3 million from HIT. There were no similar charges for the years 2001 or 2000. At the time of the recapitalization, the Company entered into two ten-year advisory agreements with the Equity Investors. The Company and the Equity Investors agreed to terminate the advisory agreements upon the closing of the initial public offering (see Note 14). In 2001, in conjunction with restructuring and related activities, a loan loss reserve of $1.5 million for executive officers was established (see Note 6). Note 17: 2000 Equity Incentive Plan and 1999 Stock Purchase and Option Plan The Company adopted the 1999 Stock Purchase and Option Plan, or the "1999 Stock Plan," which authorized the granting of stock options and the sale of Class A common stock or Class L common stock to current or future employees, directors, consultants or advisors of the Company. Under the 1999 Stock Plan, a committee of the board of directors authorized to sell or otherwise issue Class A common stock or Class L common stock at any time prior to the termination of the 1999 Stock Plan in such quantity, at such price, on such terms and subject to such conditions as established by the committee up to an aggregate of 15,500,000 shares of Class A common stock and 500,000 shares of Class L common stock, including shares of common stock with respect to which options may be granted, subject to adjustment upon the occurrence of specified events to prevent any dilution or expansion of the rights of participants that might otherwise result from the occurrence of such events. No options or stock grants have been made under the 1999 Stock Plan since our initial public offering, when the 2000 Equity Incentive Plan or "2000 Plan" became effective. 61 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued The Company's 2000 Plan was adopted by the board of directors and approved by the stockholders on June 14, 2000. Amendments to the 2000 Plan were adopted by the board of directors on January 30, 2001, and approved by the stockholders on March 16, 2001. The 2000 Plan provides for the grant of incentive stock options to employees (including officers and employee directors) and for the grant of nonstatutory stock options to employees, directors and consultants. A total of (1) 20,225,578 shares of common stock, (2) any shares returned to the company's 1999 Plan (the 1999 Stock Purchase and Option Plan) as a result of termination of options and (3) annual increases to be added on the date of each annual meeting of stockholders of the Company commencing in 2001 equal to one percent of the outstanding shares of common stock, or a lesser amount as may be determined by the board of directors, have been reserved for issuance pursuant to the 2000 Plan. Options are granted at the fair market value and expire up to ten years after the date of grant. Vesting occurs usually over a two to four year period. The following table summarizes stock option activity under the 1999 Stock Plan:
Weighted 1999 Option Plan Options Average Available Options Exercise for Grant Outstanding Price --------------------------------------------- Options reserved 2,857,408 -- $ -- Options granted (2,213,443) 2,213,443 2.35 Options cancelled 26,860 (26,860) 1.40 Options exercised -- (1,028,665) 0.29 --------------------------------------------- Balances at December 31, 1999 670,825 1,157,918 4.19 Options reserved 51,909 -- -- Options granted (682,154) 682,154 10.30 Options cancelled 106,658 (106,658) 4.96 Options exercised -- (45,174) 0.47 Options transferred (147,238) -- -- --------------------------------------------- Balances at December 31, 2000 -- 1,688,240 $ 6.71 Options reserved 57,669 -- -- Options cancelled 201,362 (201,362) 6.99 Vested options expired 22,612 (22,612) 7.48 Options exercised -- (106,772) 1.74 Options transferred (281,643) -- -- -------------------------------------------- Balances at December 31, 2001 -- 1,357,494 $ 7.05 =============================================
62 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued The following table summarizes stock option activity under the 2000 Plan:
Weighted 2000 Option Plan Options Average Available Options Exercise for Grant Outstanding Price -------------------------------------------- Balances at January 1, 2000 Options reserved 1,142,963 -- $ -- 1999 options unused 147,238 -- -- Options granted (1,263,502) 1,263,502 5.01 Options cancelled 12,770 (12,770) 12.60 -------------------------------------------- Balances at December 31, 2000 39,469 1,250,732 4.93 Options reserved 10,069,609 -- $ -- 1999 options unused 281,643 -- -- Options granted (4,768,235) 4,768,235 2.95 Options cancelled 228,001 (228,001) 4.81 Vested options expired 200 (200) 7.88 -------------------------------------------- Balances at December 31, 2001 5,850,687 5,790,766 3.30 ============================================
The following table summarizes information with respect to options outstanding and exercisable at December 31, 2001:
Options Outstanding Options Exercisable Weighted Avg. Weighted Avg. Remaining Number of Weighted Avg. Exercise Price Number of Shares Exercise Price Contractual Life Shares Exercise Price $ 0.29- 0.29 173,982 $ 0.29 7.9 46,876 $ 0.29 1.88- 1.94 2,312,800 1.88 9.7 - 2.88- 4.07 3,086,600 3.51 9.1 177,150 2.88 5.50- 7.88 900,468 5.83 7.9 371,248 5.68 9.32-12.75 674,410 12.15 8.7 141,099 12.64 ---------------------------------------------------------------- ---------------------------- $ 0.29-12.75 7,148,260 $ 4.01 9.1 736,373 $ 6.00 ================================================================ ============================
The estimated weighted average fair value of options granted in 2001, 2000 and 1999 were $1.42, $3.21 and $0.91, respectively, based on the Black-Scholes option pricing model using assumptions as described below. Employee Stock Purchase Plan In 2000, the Company adopted an employee stock purchase plan ("ESPP") for the benefit of its employees. The Plan qualified in the United States of America under section 423 of the Internal Revenue Code. Under the ESPP, substantially all employees may purchase the Company's Class A common stock through payroll deductions at a price equal to 85.0% of the lower of the fair market value at the beginning or the end of each specified six-month offering period. Stock purchases are limited to 15.0% of an employee's eligible compensation. During 2001, a total of 921,656 shares of Class A common stock at a weighted average price of $4.48 per share, were issued through the ESPP. At December 31, 2000 no shares were issued under the plan. At December 31, 2001, 221,307 shares were reserved for future issuance under the ESPP. The estimated weighted average fair value of shares purchased under the Employee Stock Purchase Plan in 2001 was $1.88. 63 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued Stock-Based Compensation The Company has adopted the disclosure only provisions of SFAS 123. Accordingly, no compensation expense has been recognized for the Company's stock option and purchase plan activity. If compensation expense had been determined based on the grant date fair value for awards in 2001, 2000, and 1999 in accordance with the provisions of SFAS 123, the Company's net income (loss) and earnings per share would have been reduced to the pro forma amounts indicated below:
December 31, 2001 2000 1999 - ------------------------------------------------------------------------------- (In thousands, except per share amounts) Net income (loss) as reported $(93,736) $ 2,869 $(11,528) Pro forma net income (loss) (99,866) 1,259 (11,692) Earnings (loss) per share as reported: Basic $ (1.36) $ 0.05 $ (0.30) Diluted $ (1.36) $ 0.05 $ (0.30) Pro forma earnings (loss) per share: Basic $ (1.45) $ 0.02 $ (0.30) Diluted $ (1.45) $ 0.02 $ (0.30) - -------------------------------------------------------------------------------
In calculating pro forma compensation, the fair value of each stock option and stock purchase right is estimated on the date of grant using the Black-Scholes option-pricing model and the following weighted average assumptions:
Employee Stock Options December 31, 2001 2000 1999 ------------------------------------------------ Dividend yield None None None Volatility 57% 54% 39% Risk-free interest rate 3.63%-4.83% 5.99%-7.13% 5.74%-6.13% Expected lives (in years) 4 4 4 Employee Stock Purchase Plan December 31, 2001 2000 1999 ------------------------------------------------ Dividend yield None None None Volatility 57% - - Risk-free interest rate 4.96%-6.33% - - Expected lives (in years) 0.5 - -
64 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued Note 18: Income Taxes The provision for (benefit from) income taxes is comprised of the following (in thousands):
December 31, 2001 2000 1999 -------- -------- -------- Current Federal ................... $ -- $ -- $ 209 State ..................... 1 1 98 Foreign ................... 941 1,584 4,680 -------- -------- -------- Total Current ..... 942 1,585 4,987 -------- -------- -------- Deferred Federal ................... 3,327 (3,533) 566 State ..................... 385 (420) 95 Foreign ................... (2,076) 5,982 (3,710) -------- -------- -------- Total Deferred .... 1,636 2,029 (3,049) -------- -------- -------- Tax expense ........................ $ 2,578 $ 3,614 $ 1,938 ======== ======== ========
Income (loss) before taxes and extraordinary items is comprised of the following (in thousands):
December 31, 2001 2000 1999 ---- ---- ---- Domestic ...................... $ (483) $(9,003) $ (1,498) Foreign ....................... (90,675) 27,063 (2,499) -------- ------- -------- $(91,158) $18,060 $ (3,997) ======== ======= ========
A summary of the composition of net deferred income tax assets (liabilities) is as follows (in thousands):
December 31, 2001 2000 -------- -------- Assets: Loss due to impaired assets .................. $ 6,424 $ 426 Income recognized for tax but not for books .. 11,324 7,598 Tax credits .................................. 7,712 2,663 NOL Carryforward ............................. 5,671 3,490 Other ........................................ 4,255 2,955 -------- -------- Total gross deferred tax assets ................... 35,386 17,132 Less valuation allowance .......................... (24,373) (6,122) -------- -------- Net deferred tax assets ........................... 11,013 11,010 Liabilities: Depreciation ................................. (16,086) (10,870) Other ........................................ (69) (570) -------- -------- Gross deferred tax liabilities .................... (16,155) (11,440) -------- -------- Total net deferred tax liability .................. $ (5,142) $ (430) ======== ========
65 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued Included in deferred tax liabilities relating to depreciation as of December 31, 2001 is an amount of $3.1 million relating to additional purchase price for the Malaysia business, which was included in non-current assets. Reconciliation of the statutory federal income tax to the Company's effective tax: December 31, 2001 2000 ------ ------ Tax at federal statutory rate .................... 35.0% 35.0% State, net of federal benefit .................... 0.9 (1.7) Valuation allowance on net operating loss ........ (6.8) -- Foreign operation net difference ................. (31.4) (16.5) Other ............................................ (0.5) 3.2 ----- ----- Provision for taxes .............................. (2.8)% 20.0% ===== ===== At December 31, 2001, the Company had approximately $10.3 million of federal and $6.2 million of state net operating loss carryforwards available to offset future taxable income, which expire in varying amounts from 2006 to 2020. Under the Tax Reform Act of 1986, the amounts of the benefits from net operating loss carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year, include, but are not limited to, a cumulative ownership change of more than 50.0%, as defined over a three-year period. As of December 31, 2001, the Company established a partial valuation allowance against its gross deferred tax assets to reduce the assets to the amount the Company deemed, more likely than not, to be recoverable prior to repatriation. The Company considered, among other factors, the historical profitability, prior to one-time charges, projections of future profits and the ability of the Company's foreign subsidiaries to utilize their deferred tax assets. The net change in total valuation allowance as of December 31, 2001 was an increase of approximately $18.3 million. Note 19: Employee Benefit Plans Retirement and Deferred Savings Plan--United States of America The Company maintains a retirement and deferred savings plan for its employees (the "401(k) Plan"). The 401(k) Plan is intended to qualify as a tax qualified plan under the Internal Revenue Code. The 401(k) Plan provides that each participant may contribute up to 15.0% of tax gross compensation (up to a statutory limit). Under the 401(k) Plan, the Company is required to make contributions based on contributions made by employees. The Company's contributions to the 401(k) Plan for the years ended December 31, 2001, 2000 and 1999 were approximately $0.2 million in each year. All amounts contributed by participants and related earnings are fully vested at all times. 66 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued Severance Benefits--Korea Employees and directors with more than one year of service are entitled to receive a lump-sum payment upon termination of their employment with CPK, based on their length of service and rate of pay at the time of termination. Accrued severance benefits are adjusted annually for all eligible employees based on their employment as of the balance sheet date. In accordance with the National Pension Act of South Korea, a certain portion of severance benefits is required to be remitted to the Korean National Pension Fund and deducted from accrued severance benefits. The amounts contributed will be refunded to employees from the National Pension Fund upon retirement. The expense for severance benefits for the years ended December 31, 2001, 2000, and 1999 amounted to approximately $2.6 million, $3.0 million, and $2.8 million, respectively. 67 ChipPAC, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued Note 20 - SUBSEQUENT EVENTS On January 30, 2002, the Company sold 10,000,000 shares of Class A common stock in an underwritten public offering based on the public offering price of $6.00 per share. In connection with this sale, the Company received net proceeds of approximately $56.2 million, after deducting underwriting discounts, commissions and estimated offering expenses. The Company used the net proceeds of $56.2 million for this offering to pay down term loans and revolving loans, respectively. The term loans had a weighted average interest rate of 8.2% for the year ended December 31, 2001, have scheduled amortization payments each quarter and mature on July 31, 2005. The revolving loans had a weighted average interest rate of 6.0% for the year ended December 31, 2001 and mature on July 31, 2005. On February 14, 2002, the Company sold an additional 1,425,600 shares of Class A common stock in conjunction with the underwriter's exercise of their over-allotment option at the public offering price of $6.00 per share. In connection with this sale, the Company received net proceeds of approximately $8.0 million, after deducting underwriting discounts and commissions and estimated offering expenses. The Company used $4.0 million of the net proceeds from the sale of the additional shares sold on February 14, 2002 to further pay down term loans. As of February 14, 2002, the term loans had a remaining balance of approximately $86.2 million and the revolving loans had been repaid in its entirety. Note 21: Supplemental Financial Statements of Guarantor/Non-Guarantor Entities In connection with the recapitalization, ChipPAC International Company Limited, ("CP Int'l"), issued senior subordinated debt securities which are fully and unconditionally guaranteed, jointly and severally, on a senior subordinated basis, by the parent company, ChipPAC, Inc. ("CPI") and by ChipPAC (Barbados) Ltd., ChipPAC Limited, ChipPAC Korea Company Limited ("CPK"), ChipPAC Malaysia Sdn. Bhd. ("CPM"), ChipPAC Luxembourg S.a.R.L., and ChipPAC Liquidity Management Hungary Limited Liability Company (the "Guarantor Subsidiaries"). All guarantor subsidiaries are wholly-owned direct or indirect subsidiaries of CPI. ChipPAC Shanghai Limited ("CPS") and ChipPAC Electronic Technology Ltd. ("CETS"), did not provide guarantees (the "Non-Guarantor Subsidiaries"). The following is consolidated and combining financial information for CP Int'l CPI, and CPK, CPS, CETS, ChipPAC (Barbados) Ltd., ChipPAC Limited, ChipPAC Luxembourg S.a.R.L., and ChipPAC Liquidity Management Hungary Limited Liability Company, segregated between the Guarantor and Non-Guarantor Subsidiaries. ChipPAC (Barbados) Ltd., ChipPAC Limited, ChipPAC Luxembourg S.a.R.L. and ChipPAC Liquidity Management Hungary Limited Liability Company were formed by Hyundai in 1999, ChipPAC Malaysia was acquired in 2000, these entities have no historical operating results or balances for the year ended December 31, 1998. As a result, it is not possible to include these entities in the supplemental financial statements for these periods. Financial information for ChipPAC (Barbados) Ltd., ChipPAC Limited, ChipPAC Luxembourg S.a.R.L. and ChipPAC Liquidity Management Hungary Limited Liability Company have not been presented as these entities have no historical financial results and future transactions will primarily consist of inter-company transactions. 68 ChipPAC, Inc. SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEETS December 31, 2001 (In thousands)
Parent Non- Guarantor Issuer Other Guarantor CPI CP Int'l Guarantors China ----------- ----------- ----------- ----------- Assets Current assets: Cash and cash equivalents $ 1,842 $ 17,093 $ 20,939 $ 1,998 Intercompany accounts receivable 59,103 85,860 20,347 12,166 Accounts receivable, net 30 11 31,961 32 Inventories -- -- 9,682 2,799 Prepaid expenses and other current assets 393 -- 3,527 595 ----------- ----------- ----------- ----------- Total current assets 61,368 102,964 86,456 17,590 Property, plant and equipment, net 6,054 -- 198,161 100,435 Intercompany loans receivable -- 352,500 -- -- Investment in subsidiaries (40,002) -- 49,171 -- Other assets 4,319 11,694 18,402 748 ----------- ----------- ----------- ----------- Total assets $ 31,739 $ 467,158 $ 352,190 $ 118,773 =========== =========== =========== =========== Liabilities and stockholders' equity (deficit) Current liabilities: Intercompany accounts payable $ 25 $ 50,018 $ 106,196 $ 21,239 Revolving loans -- 50,000 -- -- Accounts payable 2,181 749 21,615 6,500 Accrued expenses and other current liabilities 2,759 11,417 7,829 5,833 ----------- ----------- ----------- ----------- Total current liabilities 4,965 112,184 135,640 33,572 Long-term debt, less current portion -- 283,627 -- -- Convertible subordinated note 50,000 -- -- -- Intercompany loans payable -- -- 318,500 34,000 Other long-term liabilities -- -- 11,431 -- ----------- ----------- ----------- ----------- Total liabilities 54,965 395,811 465,571 67,572 =========== =========== =========== =========== Stockholders' equity (deficit): Common stock 694 -- -- -- Additional paid in capital 110,043 81,689 16,907 108,133 Receivable from stockholders (985) -- -- -- Accumulated other comprehensive income 9,169 -- 8,705 464 Accumulated deficit (142,147) (10,342) (138,993) (57,396) ----------- ----------- ----------- ----------- Total Stockholders' equity (deficit) (23,226) 71,347 (113,381) 51,201 =========== =========== =========== =========== Total liabilities and stockholders' equity (deficit) $ 31,739 $ 467,158 $ 352,190 $ 118,773 =========== =========== =========== ===========
Eliminations Consolidated ------------ ------------ Assets Current assets: Cash and cash equivalents $ -- $ 41,872 Intercompany accounts receivable (177,476) -- Accounts receivable, net -- 32,034 Inventories -- 12,481 Prepaid expenses and other current assets -- 4,515 ----------- ----------- Total current assets (177,476) 90,902 Property, plant and equipment, net -- 304,650 Intercompany loans receivable (352,500) -- Investment in subsidiaries (9,169) -- Other assets -- 35,163 ----------- ----------- Total assets $ (539,145) $ 430,715 =========== =========== Liabilities and stockholders' equity (deficit) Current liabilities: Intercompany accounts payable $ (177,478) $ -- Revolving loans -- 50,000 Accounts payable -- 31,045 Accrued expenses and other current liabilities -- 27,838 ----------- ----------- Total current liabilities (177,478) 108,883 Long-term debt, less current portion -- 283,627 Convertible subordinated note -- 50,000 Intercompany loans payable (352,500) -- Other long-term liabilities -- 11,431 ----------- ----------- Total liabilities (529,978) 453,941 =========== =========== Stockholders' equity (deficit): Common Stock -- 694 Additional paid in capital (206,729) 110,043 Receivable from stockholders -- (985) Accumulated other comprehensive income (9,169) 9,169 Accumulated deficit 206,731 (142,147) ----------- ----------- Total Stockholders' equity (deficit) (9,167) (23,226) =========== =========== Total liabilities and stockholders' equity (deficit) $ (539,145) 430,715 =========== ===========
69 ChipPAC, Inc. SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS Year ended December 31, 2001 (In thousands)
Parent Non- Guarantor Issuer CP Other Guarantor CPI Int'l Guarantors China Eliminations Consolidated --------- --------- ---------- --------- ------------ ------------ Revenue Intercompany revenue $ 27,168 $ -- $ -- $ 56,338 $ (83,506) $ -- Customer revenue -- -- 328,693 8 -- 328,701 --------------------------------------------------------------------------- Revenue 27,168 -- 328,693 56,346 (83,506) 328,701 Cost of revenue 23 -- 328,732 52,339 (83,506) 297,588 --------------------------------------------------------------------------- Gross profit 27,145 -- (39) 4,007 -- 31,113 Operating expenses: Selling, general and administrative 19,378 303 8,127 3,391 -- 31,199 Research and development 4,364 -- 9,859 -- -- 14,223 Restructuring, write down of impaired assets and other charges 1,760 -- 36,855 2,305 -- 40,920 --------------------------------------------------------------------------- Total operating expenses 25,502 303 54,841 5,696 -- 86,342 --------------------------------------------------------------------------- Operating income (loss) 1,643 (303) (54,880) (1,689) -- (55,229) Non-operating (income) expenses Interest expense 2,249 34,963 31,065 3,440 (34,503) 37,214 Interest income (146) (34,523) (439) (83) 34,503 (688) Loss from investment in subsidiaries 89,413 -- 4,983 -- (94,396) -- Foreign currency gains -- -- (156) (31) -- (187) Other (income) expense, net 23 -- (401) (32) -- (410) --------------------------------------------------------------------------- Total non-operating expenses 91,539 440 35,052 3,294 (94,396) 35,929 --------------------------------------------------------------------------- Loss before income taxes (89,896) (743) (89,932) (4,983) 94,396 (91,158) Provision for (benefit from) income taxes 3,840 1,104 (2,366) -- -- 2,578 --------------------------------------------------------------------------- Net loss $(93,736) $ (1,847) $ (87,566) $ (4,983) $ 94,396 $ (93,736) ===========================================================================
70 ChipPAC, Inc. SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31, 2001 (In thousands)
Parent Non- Guarantor Issuer Other Guarantor CPI CP Int'l Guarantors China -------------- ----------- ----------- --------- Cash flows from operating activities: Net loss $(93,736) $ (1,847) $(87,566) $ (4,983) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,821 -- 48,211 9,877 Deferred tax 1,636 -- -- -- Write down of impaired assets -- -- 32,383 2,305 Foreign currency gains -- -- (156) (31) (Gain) loss on sale of equipment 112 -- (116) 3 Equity income from investment in subsidiaries 89,413 -- 4,983 -- Changes in assets and liabilities: Intercompany accounts receivable (51,042) (66,805) 5,039 (3,862) Accounts receivable 15 (12) 13,879 (12) Inventories -- -- 8,190 579 Prepaid expenses and other current assets 14 -- (212) 2,403 Other assets 465 -- (3,183) (572) Intercompany accounts payable 22 47,529 75,360 (6,241) Accounts payable 1,172 749 (25,638) 99 Accrued expenses and other current liabilities 3,332 1,951 (17,649) 447 Other long-term liabilities (240) -- (162) (108) ------------------------------------------------------- Net cash provided by (used in) operating activities (47,016) (18,435) 53,363 (96) ------------------------------------------------------- Cash flows from investing activities: Acquisition of property, plant and equipment (4,847) -- (29,968) (11,577) Proceeds from sale of equipment 1,731 -- 8,162 (8,928) Malaysian acquisition, net of cash and cash equivalents acquired -- -- (7,399) -- Investment in subsidiaries -- -- (18,540) -- ------------------------------------------------------- Net cash used in investing activities (3,116) -- (47,745) (20,505) ------------------------------------------------------- Cash flows from financing activities: Proceeds from revolving loans -- 84,633 -- -- Repayment of revolving loans -- (49,234) -- -- Net proceeds from long term debt 46,820 27,745 -- -- Intercompany loan payments -- -- -- 18,540 Repayment of long-term debt -- (28,857) -- -- Debt issue amortization 160 1,952 -- -- Repayment of notes from stockholders 520 -- -- -- Proceeds from common stock issuance 4,312 -- -- -- Repurchase of common stock (19) -- -- -- ------------------------------------------------------- Net cash provided by financing activities 51,793 36,239 -- 18,540 ------------------------------------------------------- Net increase (decrease) in cash 1,661 17,804 5,618 (2,061) Cash and cash equivalents at beginning of year 181 (711) 15,321 4,059 ------------------------------------------------------- Cash and cash equivalents at end of year $ 1,842 $ 17,093 $ 20,939 $ 1,998 =======================================================
Eliminations Consolidated ----------- ----------- Cash flows from operating activities: Net loss $ 94,396 $ (93,736) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization -- 59,909 Deferred tax -- 1,636 Write down of impaired assets -- 34,688 Foreign currency gains -- (187) (Gain) loss on sale of equipment -- (1) Equity income from investment in subsidiaries (94,396) -- Changes in assets and liabilities: Intercompany accounts receivable 116,670 -- Accounts receivable -- 13,870 Inventories -- 8,769 Prepaid expenses and other current assets -- 2,205 Other assets -- (3,290) Intercompany accounts payable (116,670) -- Accounts payable -- (23,618) Accrued expenses and other current liabilities -- (11,919) Other long-term liabilities -- (510) ------------------------------ Net cash provided by (used in) operating activities -- (12,184) ------------------------------ Cash flows from investing activities: Acquisition of property, plant and equipment -- (46,392) Proceeds from sale of equipment -- 965 Malaysian acquisition, net of cash and cash equivalents acquired -- (7,399) Investment in subsidiaries 18,540 -- ------------------------------ Net cash used in investing activities 18,540 (52,826) ------------------------------ Cash flows from financing activities: Proceeds from revolving loans -- 84,633 Repayment of revolving loans -- (49,234) Net proceeds from long-term debt -- 74,565 Intercompany loan payments (18,540) -- Repayment of long-term debt -- (28,857) Debt issue amortization -- 2,112 Repayment of notes from stockholders -- 520 Proceeds from common stock issuance -- 4,312 Repurchase of common stock -- (19) ------------------------------ Net cash provided by financing activities (18,540) 88,032 ------------------------------ Net increase (decrease) in cash -- 23,022 Cash and cash equivalents at beginning of year -- 18,850 ------------------------------ Cash and cash equivalents at end of year $ -- $ 41,872 ==============================
71 ChipPAC, Inc. SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEETS December 31, 2000 (In thousands)
Parent Non- Guarantor Issuer Other Guarantor CPI CP Int'l Guarantors China ----------- ----------- ----------- ----------- Assets Current assets: Cash and cash equivalents $ 181 $ (711) $ 15,321 $ 4,059 Intercompany accounts receivable 8,062 19,055 25,386 8,304 Accounts receivable, net 45 -- 45,839 20 Inventories -- -- 17,872 3,378 Prepaid expenses and other current assets 407 -- 3,315 2,998 ----------- ----------- ----------- ----------- Total current assets 8,695 18,344 107,733 18,759 Property, plant and equipment, net 3,752 -- 239,002 91,979 Intercompany loans receivable -- 352,500 -- -- Investment in subsidiaries 57,522 -- 65,252 -- Other assets 3,322 11,673 26,617 176 ----------- ----------- ----------- ----------- Total assets $ 73,291 $ 382,517 $ 438,604 $ 110,914 =========== =========== =========== =========== Liabilities and stockholders' equity Current liabilities: Intercompany accounts payable $ -- $ 2,488 $ 30,840 $ 27,480 Revolving loans -- 7,800 -- -- Accounts payable 1,009 -- 47,253 6,401 Accrued expenses and other current liabilities 6,347 8,835 19,207 5,386 Current portion of long-term debt -- 6,800 -- -- ----------- ----------- ----------- ----------- Total current liabilities 7,356 25,923 97,300 39,267 Long-term debt, less current portion -- 283,400 -- -- Intercompany loans payable -- -- 318,500 34,000 Other long term liabilities 238 -- 10,890 -- ----------- ----------- ----------- ----------- Total liabilities 7,594 309,323 426,690 73,267 =========== =========== =========== =========== Stockholders' equity: Common stock 685 -- -- -- Warrants 1,250 -- -- -- Additional paid in capital 104,509 81,689 54,636 89,596 Receivable from stockholders (1,505) -- -- -- Accumulated other comprehensive income 9,169 -- 8,705 464 Accumulated deficit (48,411) (8,495) (51,427) (52,413) ----------- ----------- ----------- ----------- Total stockholders' equity 65,697 73,194 11,914 37,647 =========== =========== =========== =========== Total liabilities and stockholders' equity $ 73,291 $ 382,517 $ 438,604 $ 110,914 =========== =========== =========== ===========
Eliminations Consolidated ------------ ------------ Assets Current assets: Cash and cash equivalents $ -- $ 18,850 Intercompany accounts receivable (60,807) -- Accounts receivable,net -- 45,904 Inventories -- 21,250 Prepaid expenses and other current assets -- 6,720 ----------- ----------- Total current assets (60,807) 92,724 Property, plant and equipment, net -- 334,733 Intercompany loans receivable (352,500) -- Investment in subsidiaries (122,774) -- Other assets -- 41,788 ----------- ----------- Total assets $ (536,081) $ 469,245 =========== =========== Liabilities and stockholders' equity Current liabilities: Intercompany accounts payable $ (60,808) $ -- Revolving loans -- 7,800 Accounts payable -- 54,663 Accrued expenses and other current liabilities (18) 39,757 Current portion of long-term debt -- 6,800 ----------- ----------- Total current liabilities (60,826) 109,020 Long-term debt, less current portion -- 283,400 Intercompany loans payable (352,500) -- Other long term liabilities -- 11,128 ----------- ----------- Total liabilities (413,326) 403,548 =========== =========== Stockholders' equity: Common stock -- 685 Warrants -- 1,250 Additional paid in capital (225,921) 104,509 Receivable from stockholders -- (1,505) Accumulated other comprehensive income (9,169) 9,169 Accumulated deficit 112,335 (48,411) ----------- ----------- Total stockholders' equity (122,755) 65,697 =========== =========== Total liabilities and stockholders' equity $ (536,081) 469,245 =========== ===========
72 ChipPAC, Inc. SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS Year ended December 31, 2000 (In thousands)
Parent Non- Guarantor Issuer CP Other Guarantor CPI Int'l Guarantors China Eliminations Consolidated --------- --------- ---------- --------- ------------ ------------ Revenue Intercompany revenue $ 28,827 $ -- $ 403,796 $ 53,813 $(486,436) $ -- Customer revenue -- -- 494,408 3 -- 494,411 -------------------------------------------------------------------------- Revenue 28,827 -- 898,204 53,816 (486,436) 494,411 Cost of revenue -- -- 796,639 45,289 (456,661) 385,267 -------------------------------------------------------------------------- Gross profit 28,827 -- 101,565 8,527 (29,775) 109,144 Operating expenses: Selling, general and administrative 24,550 (8) 38,927 1,105 (29,775) 34,799 Research and development 5,562 -- 6,453 -- -- 12,015 -------------------------------------------------------------------------- Total operating expenses (income) 30,112 (8) 45,380 1,105 (29,775) 46,814 -------------------------------------------------------------------------- Operating income (loss) (1,285) 8 56,185 7,422 -- 62,330 Non-operating (income) expense Interest expense -- 39,425 58,147 3,440 (61,580) 39,432 Interest income (257) (30,587) (31,504) (75) 61,580 (843) Income from investment in subsidiaries (17,107) -- (4,512) -- 21,619 -- Foreign currency (gains) loss 126 -- (1,839) (455) -- (2,168) Other (income) expenses, net 7,849 -- -- -- -- 7,849 -------------------------------------------------------------------------- Total non-operating (income) expense (9,389) 8,838 20,292 2,910 21,619 44,270 -------------------------------------------------------------------------- Income (loss) before income taxes 8,104 (8,830) 35,893 4,512 (21,619) 18,060 Provision for (benefit from) income taxes (3,952) 323 7,243 -- -- 3,614 -------------------------------------------------------------------------- Income (loss) before extraordinary item 12,056 (9,153) 28,650 4,512 (21,619) 14,446 -------------------------------------------------------------------------- Extraordinary item: Loss from early extinquishment of debt, net Of related income tax benefit -- 2,390 -- -- -- 2,390 -------------------------------------------------------------------------- Net income (loss) $ 12,056 $ (11,543) $ 28,650 $ 4,512 $ (21,619) $ 12,056 ==========================================================================
73 ChipPAC, Inc. SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31, 2000 (In thousands)
Parent Non- Guarantor Issuer Other Guarantor CPI CP Int'l Guarantors China ---------- ---------- ------------ ----------- Cash flows from operating activities: Net income (loss) $ 12,056 $ (11,543) $ 28,650 $ 4,512 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 2,281 -- 34,073 8,695 Deferred tax (3,712) -- 5,741 -- Non-operating extraordinary loss on early debt extinguishment -- 2,390 -- -- Non-cash termination fees 4,400 -- -- -- Foreign currency (gains) loss 126 -- (1,839) (455) (Gain) loss on sale of equipment -- -- 75 (168) Equity income from investment in subsidiaries (17,107) -- (4,512) -- Changes in assets and liabilities: Intercompany accounts receivable (1,381) (9,222) 11,598 11,957 Accounts receivable (73) -- (3,446) -- Inventories -- -- 3,057 (3,212) Prepaid expenses and other current assets (177) -- (1,431) (2,726) Other assets 417 1,922 (16,145) (242) Intercompany accounts payable -- -- 2,161 (3,611) Accounts payable (242) (40) (6,966) 4,749 Accrued expenses and other current liabilities 1,878 (262) (1,438) 1,681 Other long-term liabilities (240) -- 3,537 -- -------------------------------------------------- Net cash provided by (used in) operating activities (1,774) (16,755) 53,115 21,180 -------------------------------------------------- Cash flows from investing activities: Acquisition of property, plant and equipment -- -- (69,557) (23,617) Proceeds from sale of equipment -- -- 16,415 1,134 Malaysian acquisition, net of cash and cash equivalents acquired -- -- (54,835) -- Investment in subsidiaries (72,030) 65,120 (4,592) -- -------------------------------------------------- Net cash provided by (used in) investing activities (72,030) 65,120 (112,569) (22,483) -------------------------------------------------- Cash flows from financing activities: Advances to affiliates (249) -- -- -- Proceeds from revolving loans -- 45,600 -- -- Repayment of revolving loans (37,800) -- -- Net proceeds from long-term debt -- (9,800) 73,460 -- Intercompany loan (advances) payments -- (52,500) 52,500 -- Repayment of long-term debt -- -- (73,460) -- Debt issue amortization -- 1,950 -- -- Proceeds from common stock issuance 152,578 -- -- -- Repurchase of common stock (40) -- -- -- Redemption of Class B preferred stock (79,310) -- -- -- -------------------------------------------------- Net cash provided by (used in) financing activities 72,979 (52,550) 52,500 -- -------------------------------------------------- Net decrease in cash (825) (4,185) (6,954) (1,303) Cash and cash equivalents at beginning of year 1,006 3,474 22,275 5,362 -------------------------------------------------- Cash and cash equivalents at end of year $ 181 $ (711) $ 15,321 $ 4,059 ================================================== Eliminations Consolidated Cash flows from operating activities: ------------- -------------- Net income (loss) $(21,619) $ 12,056 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization -- 45,049 Deferred tax -- 2,029 Non-operating extraordinary loss on early debt extinguishment -- 2,390 Non-cash termination fees -- 4,400 Foreign currency (gains) loss -- (2,168) (Gain) loss on sale of equipment -- (93) Equity income from investment in subsidiaries 21,619 -- Changes in assets and liabilities: Intercompany accounts receivable (12,952) -- Accounts receivable -- (3,519) Inventories -- (155) Prepaid expenses and other current assets -- (4,334) Other assets -- (14,048) Intercompany accounts payable 1,450 -- Accounts payable -- (2,499) Accrued expenses and other current liabilities -- 1,859 Other long-term liabilities -- 3,297 ------------------------------ Net cash provided by (used in) operating activities (11,502) 44,264 ------------------------------ Cash flows from investing activities: Acquisition of property, plant and equipment -- (93,174) Proceeds from sale of equipment -- 17,549 Malaysian acquisition, net of cash and cash equivalents acquired -- (54,835) Investment in subsidiaries 11,502 -- ------------------------------ Net cash provided by (used in) investing activities 11,502 (130,460) ------------------------------ Cash flows from financing activities: Advances to affiliates -- (249) Proceeds from revolving loans -- 45,600 Repayment of revolving loans -- (37,800) Net proceeds from long-term debt -- 63,660 Intercompany loan (advances) payments -- -- Repayment of long-term debt -- (73,460) Debt issue amortization -- 1,950 Proceeds from common stock issuance -- 152,578 Repurchase of common stock -- (40) Redemption of Class B preferred stock -- (79,310) ------------------------------ Net cash provided by (used in) financing activities -- 72,929 ------------------------------ Net decrease in cash -- (13,267) Cash and cash equivalents at beginning of year -- 32,117 ------------------------------ Cash and cash equivalents at end of year $ -- $ 18,850 ==============================
74 ChipPAC, Inc. SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS Year ended December 31, 1999 (In thousands)
Parent Non- Guarantor Issuer CP Other Guarantor CPI Int'l Guarantors China Eliminations Consolidated ----------- ----------- ----------- ----------- ------------ -------------- Revenue Intercompany revenue $ 10,772 $ -- $ 320,618 $ 16,863 $(348,253) $ -- Customer revenue 191,897 -- 183,482 151 -- 375,530 -------------------------------------------------------------------------- Revenue 202,669 -- 504,100 17,014 (348,253) 375,530 Cost of revenue 183,633 -- 444,339 26,997 (337,481) 317,488 -------------------------------------------------------------------------- Gross profit 19,036 -- 59,761 (9,983) (10,772) 58,042 Operating expenses: Selling, general and administrative 15,113 -- 16,878 -- (10,772) 21,219 Research and development 5,928 -- 6,434 -- -- 12,362 Restructuring, write down of impaired assets and other charges 180 -- 11,662 -- -- 11,842 -------------------------------------------------------------------------- Total operating expenses 21,221 -- 34,974 -- (10,772) 45,423 -------------------------------------------------------------------------- Operating income (loss) (2,185) -- 24,787 (9,983) -- 12,619 Non-operating (income) expense Interest expense -- 14,481 28,416 3,251 (24,907) 21,241 Interest income (625) (12,491) (14,101) (441) 24,907 (2,751) Foreign currency (gains) loss -- -- (1,253) 29 -- (1,224) (Income) loss from investment in subsidiaries 4,848 (1,502) 9,327 -- (12,673) -- Other (income) expense, net (61) -- (713) 124 -- (650) -------------------------------------------------------------------------- Total non-operating expenses 4,162 488 21,676 2,963 (12,673) 16,616 -------------------------------------------------------------------------- Income (loss) before income taxes (6,347) (488) 3,111 (12,946) 12,673 (3,997) Provision for income taxes 961 132 845 -- -- 1,938 -------------------------------------------------------------------------- Income (loss) before extra ordinary item (7,308) (620) 2,266 (12,946) 12,673 (5,935) Extraordinary item: Loss from early extinguishment of debt, net of related income tax benefit -- -- 1,373 -- -- 1,373 -------------------------------------------------------------------------- Net income (loss) $ (7,308) $ (620) $ 893 $ (12,946) $ 12,673 $ (7,308) ==========================================================================
75 ChipPAC, Inc. SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31, 1999 (In thousands)
Parent Non- Guarantor Issuer CP Other Guarantor CPI Int'l Guarantors HECS Eliminations Consolidations ----------- ----------- ----------- ---------- ------------ -------------- Cash flows from operating activities: Net income (loss) $ (7,308) $ (620) $ 893 $ (12,946) $ 12,673 $ (7,308) Adjustments to reconcile net income (loss) to net Cash provided by (used in) operating activities: Depreciation and amortization 1,753 -- 44,490 10,458 -- 56,701 Deferred tax (110) -- (2,939) -- -- (3,049) Non-operating extroaordinary loss on early debt extinguishment -- -- 1,373 -- -- 1,373 Foreign currency (gains) loss -- -- (1,224) -- -- (1,224) (Gain) loss on sale of equipment -- -- (283) 1 -- (282) Equity income from investment in subsidiaries 4,848 (1,502) 9,327 -- (12,673) -- Changes in assets and liabilities: Intercompany account receivable 4,038 (4,053) (21,244) (6,852) 28,111 -- Accounts receivable 34,879 -- (34,853) (20) -- 6 Inventories -- -- (5,780) 49 -- (5,731) Prepaid expenses and other current assets 247 -- (3,226) 73 -- (2,906) Other assets -- -- 3,317 -- -- 3,317 Advances to affiliates (443) -- (6,981) -- -- (7,424) Intercompany accounts payable (83,556) -- 114,203 (2,536) (28,111) -- Accounts payable (1,035) 40 (10,465) (155) -- (11,615) Accrued expenses and other current liabilities 4,000 9,045 6,283 693 -- 20,021 Other long-term liabilities -- -- 3,279 -- -- 3,279 ------------------------------------------------------------------------ Net cash provided by (used in) operating activities (42,687) 2,910 96,170 (11,235) -- 45,158 ------------------------------------------------------------------------ Cash flows from investing activities Acquisition of property and equipment (2,239) -- (52,792) (9,926) 7,101 (57,856) Proceeds from sale of equipment -- -- 6,017 2,431 (7,101) 1,347 Investment in subsidiaries (90,637) (29,030) (184,970) -- 304,637 -- ------------------------------------------------------------------------ Net cash used in investing activities (92,876) (29,030) (231,745) (7,495) 304,637 (56,509) ------------------------------------------------------------------------ Cash flows from financing activities Advances to affiliates -- -- -- (4,430) -- (4,430) Proceeds from revolving loans -- -- 1,169 -- -- 1,169 Repayment of revolving loans -- -- (3,769) (15,700) -- (19,469) Net proceeds of long-term debt -- 285,631 -- -- -- 285,631 Intercompany loan (advances) payments -- (271,000) 237,000 34,000 -- -- Capital redemption at recapitalization -- -- (311,220) -- -- (311,220) Capital contribution by HEI at recapitalization -- -- 19,816 -- -- 19,816 Intercompany capital contribution -- 14,215 290,422 -- (304,637) -- Repayment of long-term debt -- -- (105,387) (28,228) -- (133,615) Debt issue amortization -- 774 -- -- -- 774 Payment made to extinguish debt early -- -- (1,373) -- -- (1,373) Dividends paid -- -- (9,435) -- -- (9,435) Net proceeds from common stock issuance at recapitalization 74,071 (26) (27) -- -- 74,018 Net proceeds from preferred stock issuance 50,000 -- -- -- -- 50,000 Net Proceeds from sale of stock to management 1,671 -- -- -- -- 1,671 Contributions to (withdrawals from) paid in capital -- -- (4,052) 24,802 -- 20,750 ------------------------------------------------------------------------ Net cash provided by financing activities 125,742 29,594 113,144 10,444 (304,637) (25,713) ------------------------------------------------------------------------ Effect on cash from changes in exchange rates -- -- 414 -- -- 414 ------------------------------------------------------------------------ Net increase (decrease) in cash (9,821) 3,474 (22,017) (8,286) -- (36,650) Cash & cash equivalents at beginning of period 10,827 -- 44,292 13,648 -- 68,767 ------------------------------------------------------------------------ Cash & cash equivalents at end of period 1,006 3,474 22,275 5,362 -- 32,117 ========================================================================
76 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item with respect to directors and executive officers is incorporated by reference to ChipPac's proxy statement for the 2002 annual meeting of shareholders, or our "2002 Proxy Statement." ITEM 11. EXECUTIVE COMPENSATION The information appearing under the captions "Director Compensation" and "Executive Compensation" (including all related sub-captions thereof) in the 2002 Proxy Statement is incorporated herein by reference. The Company does not incorporate by reference in this Form 10-K either the "Compensation Committee Report on Executive Compensation" or the "Performance Graph" sections of the 2002 Proxy Statement. ITEM 12. SECURTY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the section captioned "Principal Stockholders" contained in the 2002 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the sections captioned "Compensation Committee Interlocks and Insider Participation" and "Certain Relationships and Related Transactions" in the 2002 Proxy Statement. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report (1) Financial Statements. See the "Index to Financial Statements" in item 8. (2) Financial Statement Schedules. See the schedule captioned "Valuation and Qualifying Accounts. 77 Report of Independent Accountants on Financial Statement Schedule To the Board of Directors of ChipPAC, Inc.: Our audits of the consolidated financial statements referred to in our report dated January 30, 2002 appearing in this annual report on Form 10-K of ChipPAC, Inc. also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP San Jose, California January 30, 2002, except for Note 20, as to which the date is February 14, 2002 78 CHIPPAC, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions Balance at Charged to Balance Beginning Costs and at End Year ended December 31, of Year Expenses Deductions of Year - ----------------------- ---------- ---------- ---------- ------- (in thousands) 2001 Allowance for Doubtful Receivables $ 972 $ - $ (523) $ 449 2000 Allowance for Doubtful Receivables 1,196 - (224) 972 1999 Allowance for Doubtful Receivables 1,162 144 (110) 1,196
(3) Exhibits. 2.1 Amended and Restated Agreement and Plan of Merger of ChipPAC, Inc., a California corporation, and ChipPAC, Inc., a Delaware corporation.** 2.2 Agreement and Plan of Recapitalization and Merger, dated as of March 13, 1999, by and among Hyundai Electronics Industries Co., Ltd., Hyundai Electronics America, ChipPAC, Inc. and ChipPAC Merger Corp.* 2.3 First Amendment to Agreement and Plan of Recapitalization and Merger, dated as of June 16, 1999 by and among Hyundai Electronics Industries Co., Ltd., Hyundai Electronics America, ChipPAC, Inc. and ChipPAC Merger Corp.* 2.4 Second Amendment to Agreement and Plan of Recapitalization and Merger, dated as of August 5, 1999, by and among Hyundai Electronics Industries Co., Ltd., Hyundai Electronics America, ChipPAC, Inc. and ChipPAC Merger Corp.* 3.1 Amended and Restated Certificate of Incorporation of ChipPAC, Inc.** 3.2 Amended and Restated By-Laws of ChipPAC, Inc.** 4.1 Specimen certificate for ChipPAC, Inc. Common Stock.** 10.1 Credit Agreement, dated as of August 5, 1999, by and among ChipPAC International Company Limited, ChipPAC, Inc., the Lenders listed therein and Credit Suisse First Boston, as Administrative Agent, Sole Lead Manager and Collateral Agent.* 10.2 Guaranty, dated as of August 5, 1999, by and among ChipPAC, Inc. and certain subsidiaries of ChipPAC, Inc., in favor of Credit Suisse First Boston (incorporated by reference to Exhibit 4.5 of the Company's registration statement on Form S-3 (Registration No. 333-69704)). 10.3 Subsidiary Guaranty Agreement, dated as of August 5, 1999, by and among ChipPAC Korea Company Ltd., ChipPAC Limited, ChipPAC (Barbados) Ltd., ChipPAC Luxembourg S.a.R.L., ChipPAC Liquidity Management Hungary Limited Liability Company and ChipPAC International Company Limited, in favor of Firstar Bank of Minnesota, N.A.* 10.3.1 Subsidiary Guaranty Agreement, dated as of October 12, 2001, by ChipPAC Malaysia Sdn. Bhd, in favor of U.S. Bank, N.A.(incorporated by reference to Exhibit 4.7 of the Company's registration statement on Form S-3 (Registration No. 333-69704)). 10.4 Amended and Restated Stockholders Agreement, dated as of August 5, 1999, by and among ChipPAC, Inc. the Hyundai Group (as defined therein), the 79 Bain Group (as defined therein), the SXI Group (as defined therein), Intel Corporation, ChipPAC Equity Investors LLC, and Sankaty High Yield Asset Partners, L.P.* 10.5 Amended and Restated Registration Agreement, dated as of August 5, 1999, by and among ChipPAC, Inc., the Hyundai Stockholders (as defined therein), the Bain Stockholders (as defined therein), the SXI Stockholders (as defined therein), Intel Corporation, ChipPAC Equity Investors LLC, and Sankaty High Yield Asset Partners, L.P.* 10.5.1 Amendment No. 1 to Amended and Restated Registration Agreement, dated as of June 30, 2000, by and among ChipPAC, Inc., Sapphire Worldwide Investments, Inc., the Bain Stockholders (as defined therein) and SXI Group LLC.** 10.5.2 Form of Amendment No. 2 to Amended and Restated Registration Agreement, dated as of July 13, 2000, by and among ChipPAC, Inc., Qualcomm Incorporated, SXI Group LLC and the Bain Shareholders (as defined therein).** 10.5.3 Form of Amendment No. 3 to Amended and Restated Registration Agreement, dated as of August 2, 2000, by and among ChipPAC, Inc., Bain Capital, Inc., SXI Group LLC and the Bain Shareholders (as defined therein).** 10.6 Transition Services Agreement, dated as of August 5, 1999, by and among Hyundai Electronics Industries Co., Ltd., Hyundai Electronics America, ChipPAC, Inc., ChipPAC Korea Company Ltd., Hyundai Electronics Company (Shanghai) Ltd., ChipPAC Assembly and Test (Shanghai) Company Ltd., ChipPAC Barbados Limited and ChipPAC Limited.* 10.7 Lease Agreement, dated as of June 30, 1998, by and between Hyundai Electronics Industries Co., Ltd. and ChipPAC Korea Ltd.* 10.7.1 Amendment Agreement, dated September 30, 1998, to Lease Agreement, dated June 30, 1998, by and between Hyundai Electronics Industries Co., Ltd. and ChipPAC Korea Ltd.* 10.7.2 Amendment Agreement 2, dated September 30, 1999, to Lease Agreement, dated June 30, 1998, by and between Hyundai Electronics Industries Co., Ltd. and ChipPAC Korea Ltd.* 10.8 Agreement Concerning Supply of Utilities, Use of Welfare Facilities and Management Services for Real Estate, dated as of June 30, 1998, by and between Hyundai Electronics Industries Co., Ltd. and ChipPAC Korea Ltd.* 10.9 Service Agreement, dated as of August 5, 1999, by and between Hyundai Electronics Industries Co., Ltd. and ChipPAC Limited.+* 10.10 Sublease Agreement, dated as of May 1, 1998, by and between Hyundai Electronics America and ChipPAC, Inc.* 10.11 Patent Sublicense Agreement, dated as of August 5, 1999, by and between Hyundai Electronics Industries Co., Ltd. and ChipPAC Limited.* 10.12 TCC License Agreement, dated December 22, 1998, between Tessera Inc., the Tessera Affiliates (as defined therein), ChipPAC, Inc. and the Licensee Affiliates (as defined therein).+* 10.12.1 Letter Agreement, dated July 15, 1999, by and among ChipPAC, Inc., Hyundai Electronics America, ChipPAC Limited and Tessera, Inc.* 10.13 Materials Agreement, dated as of July 1, 1999, by and between ChipPAC Limited and Intel Corporation.+* 10.14 Assembly Services Agreement, dated as of August 5, 1999, by and between Intel Corporation and ChipPAC Limited.+* 10.15 Stock Purchase Agreement, dated as of August 5, 1999, by and 80 between ChipPAC, Inc. and Intel Corporation.* 10.16 Warrant to Purchase Class B Common Stock of ChipPAC, Inc., dated as of August 5, 1999, issued to Intel Corporation.* 10.17 Advisory Agreement, dated as of August 5, 1999, by and among ChipPAC, Inc., ChipPAC Limited, ChipPAC Operating Limited and Bain Capital, Inc.* 10.18 Advisory Agreement, dated as of August 5, 1999, by and among ChipPAC, Inc., ChipPAC Limited, ChipPAC Operating Limited and SXI Group LLC.* 10.19 Employment Agreement, dated as of October 1, 1999, between ChipPAC, Inc. and Dennis McKenna.*++ 10.20 ChipPAC, Inc. 1999 Stock Purchase and Option Plan.*++ 10.21 ChipPAC, Inc. 2000 Equity Incentive Plan.**++ 10.22 ChipPAC, Inc. 2000 Employee Stock Purchase Plan.**++ 10.23.1 Form of Key Employee Purchased Stock Agreement.*++ 10.23.2 Form of Key Employee Purchased Stock Agreement (with Loan).*++ 10.24 Form of Employee Restricted Stock Agreement.*++ 10.25 Form of Directors Tranche I Stock Option Agreement.*++ 10.26 Form of Employees Tranche I Stock Option Agreement.*++ 10.27 Form of Tranche II Stock Option Agreement.*++ 10.28 Indenture, dated as of July 29, 1999, by and among ChipPAC International Limited, ChipPAC Merger Corp. and Firstar Bank of Minnesota, N.A., as trustee.* 10.29 First Supplemental Indenture, dated as of August 5, 1999, by and among ChipPAC International Company Limited, ChipPAC, Inc. and Firstar Bank of Minnesota, N.A., as trustee.* 10.30 12.75% Senior Subordinated Notes Due 2009.* 10.31 Form of Series B 12.75% Senior Subordinated Notes Due 2009.* 10.32 Intellectual Property Rights Agreement, entered into as of June 30, 2000, by and between Intersil Corporation and ChipPAC Limited.** 10.33 Supply Agreement, entered into as of June 30, 2000, by and between Intersil Corporation and ChipPAC Limited.** 10.34 Shareholders Agreement, dated as of June 30, 2000, by and among ChipPAC, Inc., the Bain Group (as defined therein), the SXI Group (as defined therein) and Sapphire Worldwide Investments, Inc.** 10.35 Class A Common Stock Purchase Agreement, dated as of July 13, 2000, by and between ChipPAC, Inc. and Qualcomm Incorporated.** 10.36 Promissory Note, dated as of August 2, 2000 by and between Dennis McKenna and ChipPAC, Inc.** 10.37 Promissory Note, dated as of August 2, 2000, by and between Robert Krakauer and ChipPAC, Inc.** 10.38 Form of Amended and Restated Supplemental Agreement No. 1 to the Advisory Agreement, dated as of August 2, 2000, by and among ChipPAC, Inc., 81 ChipPAC Limited, ChipPAC International Company Limited and Bain Capital, Inc.** 10.39 Amended and Restated Supplemental Agreement No. 4 to the Advisory Agreement, dated as of August 2, 2000 by and among ChipPAC, Inc., ChipPAC Limited, ChipPAC International Company Limited and SXI Group LLC.** 10.40 Employment letter agreement, dated as of November 15, 1999 between ChipPAC, Inc. and Robert Krakauer. (incorporated by reference to the Company's annual report on Form 10-K for the period December 31, 2000) ++ 10.41 Employment letter agreement, dated as of March 18, 1998 between ChipPAC, Inc. and Gregory Bronzovic. (incorporated by reference to the Company's annual report on Form 10-K for the period December 31, 2000) ++ 10.42 Employment letter agreement, dated as of October 4, 2000 between ChipPAC, Inc. and Richard Freeman. ++ 10.43 Employment letter agreement, dated as of October 9, 2000 between ChipPAC, Inc. and Patricia McCall. ++ 10.44 Indenture, dated as of June 15, 2001, by and between ChipPAC, Inc. and Firstar Bank, N.A. as trustee (incorporated by reference to the Company's quarterly report on Form 10-Q for the period ended June 30, 2001). 10.45 Registration Rights Agreement, dated June 22, 2001, by and between ChipPAC International Company Limited and Citicorp Capital Investors Limited ( incorporated by reference to the Company's quarterly report on Form 10-Q for the period ended June 30, 2001). 10.46 Registration Rights Agreement, dated June 22, 2001, by and between ChipPAC, Inc. and Citicorp Mezzanine III, L.P. (incorporated by reference to the Company's quarterly report on Form 10-Q for the period ended June 30, 2001). 10.47 Patent and Technology License Agreement, dated as of August 5, 1999, by and between Hyundai Electronics Industries, Co., Ltd. and ChipPAC Limited. +++ 10.48 License Agreement, dated as of February 1, 2001, by and between ChipPAC, Inc. and LSI Logic Corporation.+++ 10.49 License Agreement, dated as of February 10, 2001, by and between ChipPAC, Inc. and LSI Logic Corporation.+++ 10.50 License Agreement, dated as of August 27, 2001, by and between ChipPAC, Inc. and Fujitsu Limited.+++ 10.51 Amendment to License Agreement, dated as of March 5, 2002, by and between ChipPAC, Inc. and Fujitsu Limited. 10.52 License Agreement, dated as of September 8, 1999, by and between ChipPAC Ltd. and LSI Logic Corporation. +++ 10.53 Assembly/Final Test Subcontract Agreement, dated as of February 25, 2000, by and between ChipPAC Ltd. and its affiliates and Fairchild Semiconductor Corporation and its affiliates. +++ 21.1 Subsidiaries of ChipPAC, Inc., ChipPAC International Company Limited, ChipPAC (Barbados) Ltd., ChipPAC Limited, ChipPAC Liquidity Management Limited Liability Company, ChipPAC Luxembourg S.a.R.L. and ChipPAC Korea Company Ltd.* 23.1 Consent of PricewaterhouseCoopers LLP. 24.1 Powers of Attorney (included on signature page hereto). 99.1 Risk Factors ______________________ * Incorporated by reference to the Company's Form S-4 (No. 333-91641). ** Incorporated by reference to the Company's Form S-1 (No. 333-39428). + Confidential treatment has been granted as to certain portions of these exhibits, which are incorporated by reference. ++ Denotes management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Form 10-K. +++ Confidential treatment has been requested for portions of this exhibit. 82 ================================================================================ SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of April 1, 2002. CHIPPAC, INC. (Registrant) /s/ Robert Krakauer ------------------------------ ROBERT KRAKAUER Chief Financial Officer /s/ Michael G. Potter ------------------------------ MICHAEL G. POTTER Controller and Principal Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dennis P. McKenna, Robert Krakauer and Michael G. Potter, and each of them, his/her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him/her and in her/her name, place and stead, in any and all capacities, to sign any or all amendments to this annual report on Form 10-K under the Securities Exchange Act of 1934, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his/her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Signature Title Date --------- ----- ---- /s/ Dennis P. McKenna President, Chief Executive Officer April 1, 2002 - ---------------------- and Director (Principal Executive Dennis P. McKenna Officer) /s/ Robert J. Krakauer Senior Vice President and Chief April 1, 2002 - ---------------------- Financial Officer (Principal Financial Robert J. Krakauer Officer) 83 /s/ Michael G. Potter Controller April 1, 2002 - ----------------------- (Principal Accounting Officer) Michael G. Potter /s/ Edward Conard Director April 1, 2002 - ----------------------- Edward Conard /s/ Michael A. Delaney Director April 1, 2002 - ----------------------- Michael A. Delaney /s/ Marshall Haines Director April 1, 2002 - ----------------------- Marshall Haines /s/ Chong Sup Park Director April 1, 2002 - ----------------------- Chong Sup Park /s/ Paul C. Schorr, IV Director April 1, 2002 - ----------------------- Paul C. Schorr, IV 84 EX-10.42 3 dex1042.txt EMPLOYMENT LETTER AGREEMENT WITH RICHARD FREEMAN EXHIBIT 10.42 October 4, 2000 Mr. Richard Freeman 5995 Dry Oak Drive San Jose, CA 95120 Dear Rich: On behalf of ChipPAC, Inc. ("ChipPAC"), I am pleased to provide you with this revised offer for the position of Senior Vice President, Chief Operating Officer. You will be reporting to Dennis McKenna, President and Chief Executive Officer. Should you accept this offer, your compensation will include: An annual base salary of $325,000.00 (Three Hundred Twenty-Five Thousand Dollars) to be paid on a semi-monthly basis. Participation in the ChipPAC Short Term Incentive (STI) Plan. (Participation in the Plan is on a full month's basis, if you start on or later than the 16th of the month, you will begin participation on the first of the following month.) Your annual STI target is 100% of your base salary. For 2000, you will be guaranteed a prorated payout of 100% of your target from your hire date. In addition, ChipPAC will guarantee a minimum of 50% of your target payout for your 2001 STI payment. Subject to approval by the Board of Directors, you will be granted an option to purchase 400,000 shares of ChipPAC stock in accordance with rules established under the ChipPAC 2000 Equity Incentive Plan (the "Plan"), a copy of which is attached. The options will vest over four years. The exercise price will be set at the fair market value as determined by the Board of Directors in accordance with the Plan. In the event there is a change of control (as defined in the Plan), the options will vest in accordance with the Plan. You will be eligible to participate in ChipPAC's Employee Stock Purchase Plan. This plan will allow you to purchase shares of ChipPAC stock at a discount in accordance with the terms and conditions of the stock purchase plan. Eligibility to participate in the standard benefits offered to employees of ChipPAC. You will be eligible to accrue the maximum of four weeks (twenty days) of vacation per year beginning with your date of hire. In the event that ChipPAC terminates your employment without cause, you will be eligible to receive severance in an amount equivalent to eight months of your base salary and bonus for the fiscal year in which such termination occurs. The bonus will be prorated for the days of the performance period you would have otherwise been eligible, up to the date of termination, and provided the company has achieved its targets such that a bonus is paid out to other eligible participants for that performance period. These severance amounts shall be reduced by the amount of any compensation you receive with respect to any other employment during the eight-month period commencing on the date of your termination. As a condition of ChipPAC's obligations (if any) to make such severance payments, you will be required to sign a general release agreement at the company's direction. In the event that (a) there is a change of control (as defined in the Plan) of ChipPAC, (b) you have performed services for ChipPAC and its successor, if any, both before and after such change of control to assist in effecting the change of control, and (c) your employment is terminated within [6] months of such change of control, you will be eligible to receive severance in amount equivalent to [8] months of your base salary and bonus for the fiscal year in which such termination occurs. The bonus will be prorated for the days of the performance period you would have otherwise been eligible, up to the date of termination, and provided the company has achieved its targets such that a bonus is paid out to other eligible participants for that performance period. As a condition of ChipPAC's (or any successor's) obligations (if any) to make such change of control severance payments, you will be required to sign a general release agreement at the company's (or such successor's, if any) direction. The Immigration Control and Reform Act of 1986 requires that all new employees submit proof of employment eligibility. This proof should be submitted on your first day of employment, along with the enclosed I-9 form. To satisfy the I-9 requirements, please refer to the back of the I-9 document. You can fulfill the I-9 requirements by providing one document from list A or by providing one document from both List B and List C. Bring these documents with you on your first day of employment. We hope that you and ChipPAC will find mutual satisfaction with your employment. ChipPAC is excited about your joining the company and looks forward to a beneficial and fruitful relationship. ChipPAC recognizes the traditional Employment-At-Will doctrine between an employer and an employee which means that either party has the right to terminate the employment relationship at any time with or without cause or notice. Similarly, we both agree that any dispute arising with respect to your employment, the termination of that employment, including any alleged breach of contract claims or breach of covenant of good faith and fair dealing related to your employment at ChipPAC shall be settled by binding arbitration in accordance with the rules of the American Arbitration Association. Enclosed you will find ChipPAC's Standard Invention and Confidentiality Agreement form for your review. ChipPAC expects that you will maintain confidentiality of any proprietary information received from your previous employers. It is ChipPAC's understanding that any such agreements will not prevent you from performing the duties of this position. If you accept this offer of employment, please sign the enclosed copy of this offer letter and send it back as soon as possible. Please bring the ChipPAC Standard Inventions and Confidentiality Agreement on your first day of employment. This letter and the Agreement contain the entire agreement with respect to your employment and supersedes any prior agreements regarding your employment status. No ChipPAC representative, with the exception of ChipPAC's President or Human Resources has any authority to modify or enter into an agreement or modification, express or implied, contrary to the foregoing. Any such modification or agreement must be in writing and signed by you and the President or Human Resources, and must clearly and expressly specify an intent to change the at will nature of your employment. We look forward to counting you among those who will enjoy the growth and success of ChipPAC and hope that you will join us during this exciting time. Please indicate your acceptance of this offer of employment by signing a copy of this letter in the space below and returning one copy of this letter to me no later than October 6, 2000. If you have any questions, please feel free to contact me at (408) 486-5904. Sincerely, Connie Fredrickson-Bray Vice President, Human Resources - ---------------------------------------- Print Name - ---------------------------------------- ---------------------- Signature Date - ---------------------------------------- Start Date EX-10.43 4 dex1043.txt EMPLOYMENT LETTER AGREEMENT WITH PATRICIA MCCALL Exhibit 10.43 October 9, 2000 Ms. Patricia H. McCall 10350 Magdalena Road Los Altos Hills, CA 94024 Dear Pat: On behalf of ChipPAC, Inc. ("ChipPAC"), I am pleased to provide you with this revised offer for the position of Senior Vice President Administration, General Counsel and Secretary. You will be reporting to Dennis McKenna, President and Chief Executive Officer. Should you accept this revised offer, your compensation will include: An annual base salary of $250,000.00 (Two Hundred Fifty Thousand Dollars) to be paid on a semi-monthly basis. Participation in the ChipPAC Short Term Incentive (STI) Plan. (Participation in the Plan is on a full month's basis. If you start on or later than the 16th of the month, you will begin participation on the first of the following month.) Your annual STI target is 80% of your base salary. For 2000, you will be guaranteed a prorated payout of 100% of your target from your hire date. In addition ChipPAC will guarantee a minimum of 50% of your target payout for your 2001 STI payment. Subject to approval by the Board of Directors, you will be granted an option to purchase 100,000 shares of ChipPAC stock in accordance with rules established under the ChipPAC 2000 Equity Incentive Plan (the "Plan"), a copy of which is attached. The options will vest over four years. The exercise price will be set at the fair market value as determined by the Board of Directors in accordance with the Plan. In the event there is a change of control (as defined in the Plan), the options will vest and become fully exercisable at that time. Eligibility to participate in the standard benefits offered to employees of ChipPAC. You will be eligible to accrue the maximum of four weeks vacation per year beginning with your date of hire. As a further incentive ChipPAC will provide you with a one-time sign-on bonus of $25,000. If you should voluntarily terminate your employment within 12 months after receiving the sign-on bonus monies, you will return to ChipPAC all of those monies. In the event that ChipPAC terminates your employment without cause, you will be eligible to receive severance in an amount equivalent to eight months of your base salary and bonus for the fiscal year in which such termination occurs. The bonus will be prorated for the days of the performance period you would have otherwise been eligible, up to the date of termination, and provided the company has achieved its targets such that a bonus is paid out to other eligible participants for that performance period. These severance amounts shall be reduced by the amount of any compensation you receive with respect to any other employment during the eight-month period commencing on the date of your termination. As a condition of ChipPAC's obligations (if any) to make such severance payments, you will be required to sign a mutual release agreement at the company's direction. Should there occur a change of control (as defined in the Plan) of ChipPAC, then during the period (if any) following a change of control that you continue to provide services, the terms and provisions of this employment letter shall continue in full force and effect, unless one or more of the following occurs (i) your employment is terminated within 6 months of such change of control (ii) a material adverse change in your position causing it to be of materially less responsibility without your written consent, and such a materially adverse change shall in all events be deemed to occur if you no longer serve as Senior Vice President Administration, General Counsel reporting to the President and Chief Executive Officer, unless you consent in writing to such change; (iii) a reduction, without your written consent, in your level of base salary by more than 10% or a reduction by more than 10% in the target annual short term incentive opportunity as compared to the target annual short term incentive opportunity of the prior year (iv) a relocation of the Company's executive offices from their current location by more than 50 miles, without your written consent in which event you will be eligible to receive severance in an amount equivalent to 8 months of your base salary and bonus for the fiscal year in which such termination occurs. The bonus will be prorated for the days of the performance period you would have otherwise been eligible, up to the date of termination, and provided the company has achieved its targets such that a bonus is paid out to other eligible participants for that performance period. As a condition of ChipPAC's (or any successor's) obligations (if any) to make such change of control severance payments, you will be required to sign a mutual release agreement at the company's direction. The Immigration Control and Reform Act of 1986 requires that all new employees submit proof of employment eligibility. This proof should be submitted on your first day of employment, along with the enclosed I-9 form. To satisfy the I-9 requirements, please refer to the back of the I-9 document. You can fulfill the I-9 requirements by providing one document from list A or by providing one document from both List B and List C. Bring these documents with you on your first day of employment. We hope that you and ChipPAC will find mutual satisfaction with your employment. ChipPAC is excited about your joining the company and looks forward to a beneficial and fruitful relationship. ChipPAC recognizes the traditional Employment-At-Will doctrine between an employer and an employee which means that either party has the right to terminate the employment relationship at any time with or without cause or notice. Similarly, we both agree that any dispute arising with respect to your employment, the termination of that employment, including any alleged breach of contract claims or breach of covenant of good faith and fair dealing related to your employment at ChipPAC shall be settled by binding arbitration in accordance with the rules of the American Arbitration Association. Enclosed you will find ChipPAC's Standard Invention and Confidentiality Agreement form for your review. ChipPAC expects that you will maintain confidentiality of any proprietary information received from your previous employers. It is ChipPAC's understanding that any such agreements will not prevent you from performing the duties of this position. If you accept this offer of employment, please sign the enclosed copy of this offer letter and send it back as soon as possible. Please bring the ChipPAC Standard Inventions and Confidentiality Agreement on your first day of employment. This letter and the Agreement contain the entire agreement with respect to your employment and supersedes any prior agreements regarding your employment status. No ChipPAC representative, with the exception of ChipPAC's President or an officer in Human Resources has any authority to modify or enter into an agreement or modification, express or implied, contrary to the foregoing. Any such modification or agreement must be in writing and signed by you and the President or an officer in Human Resources, and must clearly and expressly specify an intent to change the at will nature of your employment. We look forward to counting you among those who will enjoy the growth and success of ChipPAC and hope that you will join us during this exciting time. Please indicate your acceptance of this offer of employment by signing a copy of this letter in the space below and returning one copy of this letter to me no later than October 13, 2000. If you have any questions, please feel free to contact me at (408) 486-5904. Sincerely, Connie Fredrickson-Bray Vice President, Human Resources - ---------------------------------------- Print Name - ---------------------------------------- ---------------------- Signature Date - ---------------------------------------- Start Date EX-10.47 5 dex1047.txt PATENT AND TECHNOLOGY LICENSE AGREEMENT EXHIBIT 10.47 [Translation] PATENT AND TECHNOLOGY LICENSE AGREEMENT This Patent and Technology License Agreement (the "Agreement") is made and entered into as of August 5, 1999 (hereinafter "Effective Date") by and between Hyundai Electronics Industries Co., Ltd., (hereinafter "HEI") and ChipPAC Limited (hereinafter "ChipPAC") based upon mutual trust and good-faith. Each party hereby grants to the other party a license with respect to the intellectual property rights relating to manufacture and sale of contract products (as defined herein) on the conditions set forth in this Agreement. Article 1. DEFINITIONS 1.1 "Intellectual Property Rights" shall mean patents, utility, design and computer program rights related to semiconductor assembly. HEI's Intellectual Property Rights granted to ChipPAC are limited to the intellectual property rights listed in Attachment A hereof and the applications for intellectual property rights made during the period from the base date of the Attachment A hereof to June 30, 1998 by the semiconductor business department. 1.2 "Third Party Agreement" shall mean patent license agreements that either HEI or ChipPAC executed with third parties. Article 2. GRANTS OF LICENSE 2.1 Subject to Article 4 and upon faithful fulfillment by ChipPAC of the obligations to make the payments to HEI as set forth under Article 3 hereof, HEI grants to ChipPAC a license to assemble semiconductor products on the terms and conditions set forth in this Agreement, using the Intellectual Property Rights of HEI. The license granted by this Agreement shall cover ChipPAC's license for assembly activities only and shall not include the license for other areas of semiconductor manufactured by third parties. ChipPAC's right to grant a sublicense shall be limited only to companies which are subsidiaries of ChipPAC as of the Effective Date. 2.2 In case HEI has the right to sublicense any third parties' semiconductor assembly related patent rights to ChipPAC in accordance with Third party Agreement executed by HEI, then HEI shall grant ChipPAC such sublicense in accordance with the terms and conditions of the Third Party Agreement, unless this sublicense will cause HEI to incur any additional costs. 2.3 ChipPAC grants to HEI a license to assemble semiconductor products on the terms and conditions set forth in this Agreement using the Intellectual Property Rights of ChipPAC and/or its subsidiaries. The license granted by this Agreement shall cover HEI's license for semiconductor assembly activities only and shall not include the license for other areas of semiconductor manufactured by third parties. 2.4 In case ChipPAC has the right to sublicense HEI on any third parties' semiconductor assembly related patent rights according to Third party Agreement executed by ChipPAC, then ChipPAC shall grant HEI such sublicense in accordance with the terms and conditions of the Third Party Agreement, unless this sublicense will cause ChipPAC to incur any additional cost. 1 Article 3. PAYMENTS 3.1 In consideration for the license granted by this Agreement, ChipPAC shall pay HEI [redacted *] in accordance with the following schedule: 3.1.1 Payment Schedule 3.1.1 [redacted *] on or before March 1, 2000. 3.1.2 [redacted *] on or before March 1, 2001. 3.1.3 [redacted *] on or before March 1, 2002. 3.1.4 [redacted *] on or before March 1, 2003. 3.1.2 Value added tax will be paid by ChipPAC as separately agreed upon by both parties. 3.2 The payments by ChipPAC to HEI shall be made in Korean Won to the bank account that HEI notifies ChipPAC in writing. 3.3 HEI will be responsible for residents tax and corporation income tax for HEI's income from this Agreement which are imposed by Korean Government on the payments set forth herein above. In case ChipPAC is required to withhold any residents tax and corporation income tax, it will provide HEI with tax certificates in an appropriate manner. ChipPAC shall be responsible for any taxes imposed by the British Virgin Island government on such payments. Article 4. TERMS, EXECUTION OF THE AGREEMENT AND TERMINATION 4.1 This Agreement shall be effective as of the Effective Date until December 31, 2003, unless terminated earlier by Articles 4.2, 4.3 or 6.2 of this Agreement. The term of this Agreement may be extended annually thereafter for the period of one-year per each time upon a ChipPAC's prior written notice to HEI. ChipPAC shall pay HEI a royalty of [redacted *] per annum in consideration for the license to be provided during such extended period. 4.2 Except as otherwise provided within this Agreement, each party with a material breach of this Agreement will have 30 days to cure its breach upon a written notification from the other party. If the breach is not cured within such period by the breaching party, the other party will have the right to immediately terminate this Agreement by a written notification. In such case, the license granted to the breaching party shall expire upon such termination and the notifying party's license shall continue through the term of this Agreement. 4.3 HEI will have the right to terminate this Agreement by a written notification in case of one or more of the following. 4.3.1 The filing by ChipPAC of a petition in bankruptcy or insolvency. 2 _____________ * Confidential treatment requested. 4.3.2 The appointment of a receiver for all or substantially all of the properties of ChipPAC. 4.3.3 The institution of any proceedings for liquidation or winding up of ChipPAC's business or for termination of its corporate charter. Article 5. CONFIDENTIALITY 5.1 All the information that needs to be kept secret and is related to each company's business activities such as information on technology, development, manufacture, purchase, marketing, financial, human resources management, etc., that each party acquired from the other party by executing this Agreement and by complying with this Agreement shall be kept secret during the terms of this Agreement and for 5 years thereafter by each party's responsible management and shall not be make known to third parties by each party without a prior written consent of the other party. Article 6. FORCE MAJEURE 6.1 In case of any failure to perform any obligations hereunder to the extent such failure is caused by war, acts of public enemies, fires, floods, governmental restrictions or actions, changes in the relevant laws and regulations, or any other force majeure, defaulting party shall immediately notify the other party thereof by written notification, and the notifying party will have no obligation to the other party. 6.2 If the force majeure continues beyond 90 days, the Agreement may be terminated by the non-defaulting party without any further obligations to the other party by a written notification. Article 7. WARRANTY AND INDEMNIFICATION 7.1 Each party shall not be responsible for the other party's infringement of any third parties' rights by using the other party's Intellectual Property Rights. 7.2 ChipPAC shall immediately notify HEI in writing in any event when ChipPAC becomes aware of occurrence of any third party's infringement of HEI's Intellectual Property Rights with as much details as possible. ChipPAC shall cooperate with HEI so that HEI may take appropriate actions against such infringement(s). Article 8. MISCELLENOUS PROVISIONS 8.1 A Party which do not exercise its rights granted within this Agreement shall not be considered as waiving its rights provided within this Agreement. 8.2 Should any clause, sentence, or paragraph of this Agreement be declared to be invalid, unenforceable, or void, such decision shall not have the effect of invalidating or voiding the remainder of this Agreement. 3 8.3 HEI shall not be held liable to ChipPAC, even though any intellectual property rights provided in Attachment A hereof are not patentable due to the rejection by the authorities or such intellectual property rights are nullified or reduced in their scope after the review by the authorities. 8.4 This Agreement or any rights and obligations set forth in this Agreement shall not be assigned to or taken over by any third parties without a prior consent of the other party. 8.5 Notification regarding this Agreement shall be made by a written notification to the address below unless notified otherwise in advance. 8.5.1 For HEI: 8.5.1 For HEI: Hyundai Electronics Industries Co., Ltd. Attention: Senior Manager, Patent Department Hyundai Jeon-ja Building 66 Jukseon-dong, Chongro-ku, Seoul Tel: (822) 398-4540 Fax: (822) 398-4533 For ChipPAC: ChipPAC Limited Craigmuir Chambers P.O. Box 71 road Town, Tortola British Virgin Islands Attention: Resident Director Tel: (284) 494-2233 Fax: (284) 494-3547 with a copy to: ChipPAC, Inc. 3151 Cordona Drive Santa Clara, California 95054 U.S.A. Attention: President 8.6 Any disputes between the parties thereto shall be resolved amicably by normal commercial practice. However, if there is no commercial practice, such disputes shall be interpreted in accordance with Korean laws. 8.7 Any disputes in relation to this Agreement that have not been resolved amicably shall be presented before Seoul District Court for trial. 8.8 This Agreement shall not be modified unless both parties agree in writing. 4 Each party will have one fully executed copy of this Agreement as proof and existence of this Agreement. HEI: /s/ CEO Young Hwan Kim Hyundai Electronics Industries Co., Ltd. San 136-1, Ami-ri, Bubal-eub, Ichon-si, Kyoungki-do ChipPAC: /s/ Authorized Signatory ChipPAC Limited Craigmuir Chambers P.O. Box 71 Road Town, Tortola British Virgin Islands 5 EX-10.48 6 dex1048.txt LICENSE AGREEMENT DATED 02/01/01 EXHIBIT 10.48 LICENSE AGREEMENT This License Agreement ("Agreement") effective as of Feb 1, 2001 ("Effective Date"), is made by and between LSI Logic Corporation, a Delaware corporation ("LSI"), and ChipPac, Limited (hereafter "ChipPac"), a British Virgin Islands Corporation (each of whom is individually sometimes referred to as a "Party" and both of whom are collectively sometimes referred to as "Parties). RECITALS This Agreement is made with reference to the following facts and circumstances: A. Whereas LSI wishes to license to ChipPac certain Packaging Technology (as defined below) pertaining to "EPBGA's" and, ChipPac wishes to obtain such a license, according to the terms and conditions set forth herein. B. Whereas LSI wishes to obtain certain packaging services from ChipPac and ChipPac wishes to provide such services, according to the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and the terms, covenants and conditions contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows: 1. DEFINITIONS AND RULES OF CONSTRUCTION DEFINITIONS. In addition to the terms defined elsewhere in this Agreement, the following words and expressions shall have the meanings set forth below: 1.1 "Affiliate" of a Party means, any corporation, limited liability company, partnership or other business enterprise: (a) which owns or controls, directly or indirectly, fifty percent (50%) or more of the voting rights with respect to the election of directors or managers, or which has practical control directly or indirectly, of any Party to this Agreement; (b) of which fifty percent (50%) or more of the voting rights with respect to the election of directors or managers is owned or controlled, directly or indirectly, by, or which is under the practical control directly or indirectly of, any Party to this Agreement; or (c) of which fifty percent (50%) or more of the total voting rights with respect to the election of directors or managers is owned or controlled, directly or indirectly, by, or which is under the practical control directly or indirectly of, any corporation, limited liability company, partnership or other business enterprise qualifying under subsections (a) or (b) above. Any corporation, limited liability company, partnership or other business enterprise which would at any time an Affiliate of LSI or ChipPac by reason of the foregoing, shall be considered an Affiliate for purposes of this Agreement only for so long as the foregoing conditions are met. 1.2 "Confidential Information" means (i) the Technical Information, in whatever form embodied; and (ii) information disclosed by either party, if disclosed in writing, that is identified and marked as confidential (or with words of similar import) at the time of its disclosure or which, if disclosed verbally, is designated confidential at the time of disclosure and is summarized and identified as confidential in a writing delivered to the receiving party on or before thirty (30) days after the disclosure; provided that Confidential Information shall in no event include any information that: (a) was known to the receiving party prior to its receipt hereunder; (b) is or becomes publicly available without breach of this Agreement; (c) is received from another without obligation of confidentiality to the disclosing party and without breach of this Agreement; or (d) is disclosed by the disclosing party to anther without an obligation of confidentiality. 1.3 "EPBGA" means an enhanced plastic ball grid array package for semiconductor device that is one of the packages listed in Exhibit A. 1.4 "LSI Improvements" means all developments, enhancements, modifications or betterments that may be made in the Packaging Technology or Technical Information, or that is otherwise useful with respect to the manufacture or design of an EPBGA, whether or not patented, patentable, copyrighted or copyrightable. 1.5 "Intellectual Property Rights" means (a) all Patent Rights; (b) all copyrights and all other literary property and author rights, and all rights, title and interest in and to all copyrights, copyright registrations certificates of copyrights and copyrighted interests; and (c) all rights, title and interest in and to all trade secrets and trade secret rights. 1.6 LSI's Intellectual Property Rights" means: (i) all copyright and trade secret rights solely owned by LSI that, absent the license herein, would be necessarily and unavoidably infringed or misappropriated by the exploitation (as permitted herein) of the Technical Information provided hereunder by LSI or its Affiliates to ChipPac; and (ii) all patents that issue from the applications listed in Exhibit B, including any reissue, division, term extension, continuation or continuation-in-part (to the extent the claims of such continuation in part are supported by a specification of an application listed in Exhibit B) of any such applications. 1.7 "Packaging Technology" means LSI's technology for use in packaging integrated circuits as described in the Technical Information provided by LSI to ChipPac hereunder. 1.8 "Patent Rights" means any patent rights, letters patent and applications for letters patent, or other government-issued or granted indicia of invention ownership, including any reissue, division, term extension, continuation or continuation-in-part. 1.9 "Technical Information" means any and all data regarding the EPBGA's and LSI Improvements, including, without limitation, data regarding thermal properties, electrical properties, mechanical and structure properties, net list, full substrate and raw material dimensions, and reliability data. 2 2. LICENSE AND TECHNOLOGY TRANSFER 2.1 License Grant. Subject to the terms and conditions of this Agreement, ------------- LSI agrees to grant and does hereby grant to ChipPac, non-exclusive, non-transferable right and license under LSI's Intellectual Property Rights to use the Packaging Technology and the LSI-owned Technical Information and Applicable Improvements for the purposes of manufacturing, using, distributing, marketing, selling, exporting and importing EPBGA's worldwide. 2.2 No Sublicenses; No Rights in Trade Marks; No Implied Licenses. The ------------------------------------------------------------- license granted pursuant to Section 2.1 shall not be sublicensed by ChipPac will convey no right to ChipPac to use or register any trademarks, service marks, or trade names of LSI or of its Affiliates. Nothing herein shall be construed as committing LSI to convey to ChipPac either expressly or by implication, any right under any letters patent or other Intellectual Property Rights of LSI, or any right to use any LSI-owned or LSI-controlled Technical Information provided to ChipPac by LSI, except as explicitly set forth in Section 2.1 2.3 Have Made Rights Excluded. "Have-made" rights are not included in the ------------------------- license granted under Section 2.1. Accordingly, ChipPac shall not have the right to have EPGA's made for it by a third party (including, without limitation, any Affiliate of ChipPac) at a third party's manufacturing facility or elsewhere without the prior written approval of LSI, which approval LSI may withhold in its sole and absolute discretion. 2.4 Marking. ChipPac shall comply with all pertinent patent marking ------- statutes with respect to any patents that are part of LSI's Intellectual Property, provided that LSI provides adequate information to ChipPac to enable ChipPac to comply with such statutes. 2.5 Ownership. As between the Parties, LSI shall retain ownership of the --------- Packaging Technology, LSI-owned Technical Information provided by LSI to ChipPac, and all of LSI's Intellectual Property Rights. 3. IMPROVEMENTS ChipPac hereby grants LSI a non-exclusive, fully paid-up, royalty-free, perpetual, irrevocable, worldwide license under all pertinent Intellectual Property Rights in and to ChipPac Improvements to make, have made, use and sell packaging for semiconductor products, with the right to grant sublicenses therefor to any one or more of LSI's Affiliates and to persons that do not materially compete with ChipPac. Upon LSI's request, ChipPac will provide LSI with all pertinent know-how regarding any ChipPac Improvement. 4. TECHNOLOGY TRANSFER On or before March 31, 2001, LSI will provide ChipPac the Technical Information. LSI will provide a reasonable amount of technical support, not to exceed 320 man hours, to assist ChipPac with implementing the Technical Information. ChipPac shall bear all out of pocket expenses LSI incurs in connection with such technical support. 3 5. FEES 5.1 Fees. In consideration of the right and license to use the Packaging ---- Technology and the associated Technical Information grants in Section 2.1, ChipPac shall pay to LSI U.S. [redacted *] according to the schedule set forth in Exhibit C. Payments shall be nonrefundable. 5.2 License Fees. In consideration of the right and license to use the ------------ Packaging Technology and the associated LSI-owned or LSI-controlled Technical Information granted in Section 2.1, ChipPac shall pay LSI for Licensed Products manufactured and provided by ChipPac to any third party a deferred license fee in the amount of [redacted *] per solder ball (output lead for coupling to a printed circuit board) on each such Licensed Product (excluding Licensed Products produced by ChipPac for LSI). In no event shall license fees due pursuant to this Section exceed U.S. [redacted *] ("License Cap"). Further, no license fees will be due for Licensed Products manufactured by ChipPac on and after three years after the Effective Date. No license fees shall be due for EPBGA's (i) ChipPac's customers; or (ii) designed by ChipPac without use of any LSI Intellectual Property Rights in the LSI-owned Technical Information provided to ChipPac pursuant to this Agreement; in no event shall any EPBGA described by (i) or (ii) above be deemed a Licensed Product and such EPBGA's will therefore not be licensed hereunder. 5.3 Interest on Late Payments. Any payment not received by LSI in ------------------------- immediately available funds by the fifth (5th) business day following any date by which such payment is due shall bear interest from such due date until paid in full by ChipPac to LSI at the annual rate equal to 10%; provided, however, that in no event shall such interest rate exceed the highest rate permissible under applicable law. 5.4 Taxes. All taxes imposed as a result of any payments made pursuant to ----- this Article 5 shall be become and paid by the Party required to do so by applicable law; provided, however, that if so required by applicable law and any relevant tax treaty, ChipPac shall (a) withhold the amount of any national or federal income taxes levied by the governments in question, on the payments to be made pursuant to this Article 5, and (b) promptly effect payment thereof to the appropriate taxing authorities; and (c) transmit to LSI officials tax receipts or other evidence issued by said appropriate taxing authorities sufficient to enable LSI to support a claim for the appropriate income tax credit in respect of any such taxes so withheld and paid to the governments in question. 5.5 Verification. ChipPac shall provide LSI with reasonable access to ------------ ChipPac's facilities and applicable records to enable LSI to determine if any of the events set forth in Exhibit C have occurred. 6. WARRANTIES AND REPRESENTATIONS 6.1 General Warranties and Representations. Each Party warrants and -------------------------------------- represents to, and covenants with, the other Party that all corporate action necessary for the authorization, execution and delivery of this Agreement by such Party and the performance of its obligations hereunder has been taken. 4 ______________ * Confidential treatment requested. 6.2 Disclaimer. EXCEPT AS OTHERWISE PROVIDED IN SECTION 6.3, LSI DISCLAIMS ---------- ANY AND ALL EXPRESS WARRANTIES, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NONINFRINGEMENT, PERTAINING TO THE PACKAGING TECHNOLOGY, TECHNICAL INFORMATION, OR ANY OTHER TECHNOLOGY PROVIDED BY LSI HEREUNDER. Without limiting the foregoing, nothing in this Agreement shall be deemed to be a warranty or representation, either express or implied, that: (i) LSI or its Affiliates will continue to develop the Packaging Technology; and (ii) that LSI will enforce LSI's Intellectual Property Rights against any third party. LSI shall have no liability whatsoever to ChipPac in the event that ChipPac is unable to successfully implement the Packaging Technology. 6.3 Limited Intellectual Property Warranties. LSI warrants and represent ---------------------------------------- to ChipPac that as of the Effective Date for the Packaging Technology, the Packaging Technology and the associated Technical Information do not impermissibly include any trade secrets or copyrighted material of any third party. ChipPac warrants and represents to LSI that any and all ChipPac Improvements provided by ChipPac to LSI will not impermissibly include any trade secrets or copyrighted material of any third party. 7. LIMITATION ON DAMAGES LSI SHALL NOT BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL LOSS OR DAMAGE (INCLUDING, WITHOUT LIMITATION, LOSS OF PROFITS AND LOSS OF USE) SUFFERED BY CHIPPAC ARISING FROM OR RELATING TO LSI'S PERFORMANCE, NON-PERFORMANCE, BREACH OF OR DEFAULT UNDER A COVENANT, WARRANTY, REPRESENTATION, TERM OR CONDITION OF THIS AGREEMENT. LSI'S AGGREGATE LIABILITY ARISING FROM OR RELATING TO LSI'S PERFORMANCE, NON-PERFORMANCE, BREACH OF OR DEFAULT UNDER A COVENANT, WARRANTY, REPRESENTATION, TERM OR CONDITION OF THIS AGREEMENT, SHALL NOT EXCEED THE PAYMENTS IT HAS RECEIVED FROM CHIPPAC HEREUNDER. THE LIMITATIONS ON LIABILITY AND DAMAGES SET FORTH ABOVE APPLY TO ALL CAUSES OF ACTION THAT MAY BE ASSERTED HEREUNDER, WHETHER SOUNDING IN BREACH OF CONTRACT, BREACH OF WARRANTY, TORT, PRODUCT LIABILITY, NEGLIGENCE OR OTHERWISE. IN NO EVENT SHALL LSI BE LIABLE FOR THE COST OF PROCUREMENT OF SUBSTITUTE TECHNOLOGY. 8. THIRD PARTY CLAIMS 8.1 Intellectual Property Rights. Subject to (a) the limitations set forth ---------------------------- in Article 7 and in this Article 8, each Party ("Defending Party") shall defend and settle any claim, demand, cause of action, loss, damage, liability, fine, penalty, cost or expense (each, a "Claim") brought against the other Party ("Defended Party") arising our of a breach of the Defending Party's warranties and representations set forth in Section 6.3 and pay all damages solely attributable to such breach that are awarded pursuant to such Claims. As a condition of the Defending Party's obligations set forth in the preceding sentence, the Defended Party shall give the Defending Party prompt written notice of any such Claims as described in the first sentence of this Section, 5 full authority to defend and settle such Claims and all reasonable assistance to the Defending Party (at the Defending Party's expense) as may be requested by Defending Party. If, as a result of a Claim for which LSI is the Defending Party, ChipPac becomes enjoined from using the Packaging Technology or if LSI reasonably believes such a Claim may be initiated: (a) LSI shall, at its election, (i) procure for ChipPac the right to use the Packaging Technology; (ii) provide ChipPac with replacement technology (which shall become Packaging Technology) that is non-infringing that is a reasonable substitute for the infringing Packaging Technology; or (iii) terminate ChipPac's license hereunder and if such termination occurs within three years from the Effective Date, refund a fraction of all payments made under Article 5, the numerator of the fraction equal to the number of days between the date of such termination and the date that is three years from the Effective Date, the denominator equal to three (3) years. In cases (ii) and (iii) above, ChipPac will immediately cease using the Packaging Technology in question upon receiving written notice from LSI. In the case where ChipPac is the Defending Party, the Defended Party shall include LSI's Affiliates. THIS SECTION STATES THE ENTIRE LIABILITY OF EACH PARTY AND THE EXCLUSIVE REMEDY OF EACH PARTY WITH RESPECT TO INFRINGEMENT. EXCEPT AS EXPRESSLY STATED IN THIS SECTION 8.1, ALL WARRANTIES AGAINST INFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHTS, STATUTORY, EXPRESS OR IMPLIED ARE HEREBY DISCLAIMED. 8.2 Exclusions. LSI shall have no obligation under Section 8.1 arising ---------- out of or relating to the continued use of any infringing technology after LSI has provided ChipPac with written notice pursuant to Section 8.1 to cease such use. Furthermore, ChipPac will defend and indemnify LSI from and against any liability, damages, cost or expense (including attorney's fees) arising out of any such Claim asserted against LSI arising out of or relating to any act or condition described in the preceding sentence; provided, however, that such duty of indemnity shall conditioned upon LSI giving ChipPac prompt written notice of any such Claims, full authority to defend and settle such Claims and all reasonable assistance to ChipPac (at ChipPac's expense) as may be requested by ChipPac. 8.3 Notice. Each Party ("Notifying Party") shall provided the other ------ Party ("Notified Party") with written notice promptly after learning of any allegations that the Notifying Party's use or exploitation of any technology provided by the Notified Party hereunder infringes or misappropriates any third party's Intellectual Property Rights. To the extent that any Claims arising our of such allegations do not arise out of the Notified Party's warranties pursuant to Section 6.3, the Notified Party shall have the right, but not the obligation, to assist in the defense of any such Claims. 8.4 High Risk Activities: Indemnity. The Packaging Technology is not ------------------------------- intended to create packaging for products that will be used in medical or aviation activities or in other high risk activities. Excepted as provided in Section 8.1 or for any Claims arising out of patent infringement that is unavoidable consequence of using the Packaging Technology, ChipPac shall indemnify and hold LSI and its Affiliates, and their officers, directors, employees and agents, from and against any Claim brought by any third party arising out of packaging services provided by ChipPac to any person or otherwise arising out of ChipPac's use of the Packaging Technology and/or Technical Information. 6 9. ENFORCEMENT ChipPac shall not have the right to enforce any of LSI's Intellectual Property Rights. In the event that ChipPac learns that any third party is infringing or misappropriating any of LSI's Intellectual Property Rights, ChipPac shall promptly thereafter provide LSI with written notice regarding such infringement or misappropriation. 10. TERM; DEFAULT AND TERMINATION; EFFECT OF TERMINATION 10.1 Term. Unless sooner terminated pursuant to the early termination ---- provisions hereof, this Agreement shall be effective upon the Effective Date and shall continue in effect unless earlier terminated as described below. 10.2 Termination for Default. If either Party defaults on a material ----------------------- provision and does not cure such default within forty-five (45) days after written notice thereof is received from the other Party, such other Party shall have the right at its option to terminate the Agreement. 10.3 Insolvency. Should either Party: (a) become insolvent; (b) make an ---------- assignment for the benefit of creditors; (c) file or have filed against it a petition in bankruptcy or seeking reorganization; (d) have a receiver appointed; or (e) institute any proceedings for liquidation or winding up; then the other Party may, in addition to other rights and remedies it may have, terminate the Agreement or any purchase orders placed under the Agreement immediately by written notice. 10.4 Breach of Confidentiality. ChipPac acknowledges that a breach or ------------------------- default by it of its covenants regarding non-disclosure and confidentiality contained in Section 12.1 will result in irreparable injury LSI, and consequently LSI shall be entitled to temporary, preliminary and permanent injunctive relief or to a protective order for any threat or actual violation of the provisions of Section 12.1. ChipPac agrees and consents to the entry of an injunction or protective order by any court of competent jurisdiction upon a showing by LSI of a reasonable belief that the Confidential Information is being used or disclosed contrary to the terms of Section 12.1. The foregoing provisions are in addition to, and not limitation of, the remedies of specific performance, termination of this Agreement, damages, and any other remedies at law, in equity or otherwise that LSI may have upon breach of Section 12.1. The Parties stipulate that the arbitration provisions of Section 13.11 shall not apply to any temporary restraining order, injunctive relief, protective order or other provisional remedy sought to prohibit a breach or threatened breach of the provisions of Section 12.1. 10.5 Rights and Remedies; Termination of Certain Provisions. The ------------------------------------------------------ termination of this Agreement shall be without prejudice to (a) the right of LSI to receive upon its request all payments accrued and unpaid hereunder; (b) the rights and remedies of any Party with respect to any previous breach of any other representations, warranties, covenants, terms, conditions or provisions of this Agreement (provided that the limitation on liability set forth in Article 7 shall apply to such rights and remedies); (c) any rights to indemnification set forth herein; (d) the grant-back license from ChipPac to LSI in ChipPac's Improvements under Article 3; and (e) any other provisions hereof which expressly or necessarily call for performance after the termination of this Agreement. 7 11. ADDITIONAL BANKRUPTCY PROVISIONS 11.1 Generally. This is a contract under which applicable law excuses --------- LSI from accepting performance from or rendering performance to ChipPac within the meaning of sections 365(c) and 365(e)(2) of the Bankruptcy Code, 11 U.S.C. Secs. 365(c), 365(e)(2). Accordingly, in the event of ChipPac's bankruptcy, this Agreement cannot be assumed or assigned without LSI's express written consent. 11.2 Assumption. In the event LSI consents to assumption and assignment ---------- of this Agreement, any person or entity to which this Agreement is assigned pursuant to the provisions of the Bankruptcy Code, 11 U.S.C. Section 101 et seq., shall be deemed without further act or deed to have assumed all of the obligations arising under this Agreement on and after the date of such assignment. Any such assignee shall upon demand execute and deliver to LSI an instrument confirming such assumption. 11.3 Lifting of Stay. In the event that ChipPac is the subject of any --------------- insolvency, bankruptcy, reorganization, or similar proceeding under the United States Bankruptcy Code, voluntarily or involuntarily, the Parties stipulate that LSI is entitled to the automatic and absolute lifting of the automatic stay as to the enforcement of its remedies under this Agreement, including specifically but not limited to the stay imposed by 11 U.S.C. Section 362, as amended; ChipPac hereby consents to the immediate lifting of any such automatic stay, and will not contest any action by LSI to lift such stay; ChipPac expressly acknowledges that (a) it has no equity in the license and rights granted under this Agreement, and (b) the license and rights granted under this Agreement is not now, and will never be necessary to any plan of reorganization. 12. CONFIDENTIALITY 12.1 Obligation. Each Party agrees to maintain in confidence the other ---------- Party's Confidential Information. Neither Party shall disclose the other Party's Confidential Information to any other person or organization without the prior written consent of the other Party. Each Party shall protect such information from disclosure to others with at least the same degree of care as such Party exercises to protect its own information of similar type and importance provided that the degree of care exercised with respect to Confidential Information that is Technical Information shall in no event be less than a high degree of care. Each Party shall disclose the other Party's Confidential Information only to those employees of the receiving Party that have a need to know such information. Neither Party shall use the other Party's Confidential Information except as expressly permitted in this Agreement. The obligations of confidentiality and protection required by this section shall survive the expiration, termination or cancellation of this Agreement for a period of five (5) years provided that the obligations with respect to Confidential Information that is Technical Information shall survive in perpetuity. 12.2 Third Party Request for Information. Except as otherwise provided ----------------------------------- in this Agreement, either Party shall immediately notify the other Party of any private or governmental request for secret or confidential information (including, without limitation, Confidential Information) or any other information or documents relating to this Agreement. Each Party shall have the right to participate in any other Party's response to any such request. In the event that a Party receives any subpoena or other legal process requiring the production of information, 8 documents, data, work papers, reports, or other materials relating to any secret or confidential information (including, without limitation, Confidential Information) or to this Agreement, that party shall: (a) give the other Party, if possible, the opportunity to participate in quashing, modifying or otherwise responding to any compulsory process in an appropriate and timely manner; and (b) cooperate fully with the other Party's efforts to narrow the scope of any such compulsory process, to obtain a protective order limiting the use or disclosure of the information sought, or in any other lawful way to obtain continued protection of the secret or confidential information. 12.3 Notice. If either Party ("First Party") becomes aware of the loss, ------ theft or misappropriation of the other Party's Confidential Information which is in the First Party's possession or control, the First Party shall notify the other Party in writing within five (5) days of its discovery of such loss, theft or misappropriation. 12.4 Terms Confidential; Publicity. Neither Party shall disclose the ----------------------------- terms and conditions of this Agreement to any third party without the other Party's prior written consent, except to the extent required by applicable governmental authorities. Notwithstanding the foregoing, each Party shall have the right to disclose this Agreement to its attorneys, accountants and like personnel, and to potential investors or acquirers, under reasonable conditions of confidentiality. ChipPac agrees to issue joint press announcements with LSI promptly after the Effective Date and promptly after Initial Qualification. Each party must approve of the content of such announcements before they are released. Neither party shall otherwise issue a press release regarding this Agreement without the other Party's prior written consent. 13. GENERAL PROVISIONS 13.1 Assignment. ChipPac shall not assign any of its rights or ---------- privileges hereunder, whether by operation of law or otherwise (including, without limitation by merger with or acquisition by a third party) without the prior written approval of LSI, which approval LSI shall not be unreasonably withheld. Any attempted assignment in violation of this Section 13.1 shall be null and void ab initio. LSI shall have the unrestricted right to assign this Agreement to any person, in which case the definition of "LSI's Intellectual Property Rights" shall include only those Intellectual Property Rights licensed hereunder prior to the effective date of any such assignment. 13.2 Controlling Law. This Agreement shall be construed and interpreted --------------- in accordance with the law of the State of California (except its choice of law rules) as though made by two parties residing in California so as to be fully performed within that State. 13.3 Export Controls. ChipPac shall comply with all export control laws --------------- and regulations of the United States of America. 13.4 Waiver. No failure or delay on the part of either party in the ------ exercise of any right or privilege hereunder shall operate as a waiver thereof or of the exercise of any right or 9 privilege hereunder, nor shall any single or partial exercise of any such right or privilege preclude other or further exercise thereof or of any other right or privilege. 13.5 Notice. Any notice or claim provided for herein shall be in ------ writing and shall be given (i) by personal delivery, effective upon delivery, (ii) by first class mail, postage prepaid, addressed to the address first stated above for the recipient, effective one (1) business day after proper deposit in the mail, or (iii) by facsimile directed to the facsimile number first indicated above for the recipient, but only if accompanied by mailing of a copy in accordance with (ii) above, effective as of the date of facsimile transmission. 13.6 Severability; Several Rights and Obligations. If any provision of -------------------------------------------- this Agreement is held to be ineffective, unenforceable or illegal for any reason, such decision shall not effect the validity or enforcement of any or all of the remaining portions thereof. If more than one Product is covered under this Agreement, then the rights and obligations of the parties as to each such Product shall be several and independent from those as to any other Product. 13.7 Other Rights. Nothing contained in this Agreement shall be ------------ construed as conferring by implication, estoppel or otherwise upon either party or any third party any license or other right except, solely as to the parties hereto, the rights expressly granted hereunder. 13.8 Publicity. All notices to third parties and all other publicity --------- concerning the transactions contemplated by this Agreement shall be jointly planned and coordinated by and between the parties. Neither of the parties shall act unilaterally in this regard without the prior written approval of the other party; however, this approval shall not be unreasonably withheld. 13.9 Titles. Any titles included herein are for convenience only and ------ are not to be used in the interpretation of this Agreement. 13.10 Integration; Modification. This Agreement together with the ------------------------- Exhibits hereto, embodies the final, complete and exclusive statement of the terms of their agreement with respect to the subject matter hereof and supersedes any prior or contemporaneous representations, descriptions, courses of dealing or agreements as to such subject matter. No amendment or modification of this Agreement or any Exhibit hereto shall be valid or binding upon the parties unless in writing and signed by an officer of each party, and NO LSI EMPLOYEE OR REPRESENTATIVE HAS ANY AUTHORITY OTHERWISE TO BIND LSI TO ANY OBLIGATION OR LIABILITY NOT EXPRESSLY STATED HEREIN. 13.11 Arbitration. Any dispute relating to the enforceability, ----------- interpretation of performance of this Agreement (other than claims for which injunctive relief is sought), or relating to the parties' relationship or any transactions between them arising out of this Agreement, shall be resolved at the request of either party through binding arbitration in San Francisco, California; provided, however, that it shall not be deemed a waiver of the right to arbitrate for a party to seek, nor shall this Agreement be interpreted to preclude a party from seeking, in a court of competent jurisdiction, temporary or preliminary injunctive relief pending entry of judgment on any arbitration award, or other appropriate prejudgment relief. Any discovery shall be conducted in accordance with the Federal Rules of Civil Procedure. Except as otherwise expressly provided herein, arbitration shall be conducted in accordance with the 10 Commercial Rules of the American Arbitration Association. The arbitrator(s) shall be (an) individual(s) with substantial experience in legal issues relating to high technology electronics. Judgment upon award by the arbitrator may be entered by any state or federal court having jurisdiction. 13.12 Relationship to the Parties. The relationship of the parties hereto --------------------------- is that of independent contractors. Neither party, nor its agents or employees shall be deemed to be the agent, employee, joint venturer, partner or fiduciary of the other party. Neither party shall have the right to bind the other party, transact any business in the other party's name or on its behalf or incur any liability for or on behalf of the other party. IN WITNESS HEREOF the parties have caused this Agreement to be signed by their duly authorized representatives. LSI LOGIC CORPORATION ("LSI") By: /s/ Maniam Alagaratnam ------------------------------------ Name: Maniam Alagaratnam Title: Vice President, Package Development, Worldwide Operations Address: 1551 McCarthy Blvd. Milpitas, CA 95035 Telephone: 408-954-4932 Facsimile: 408-433-4311 ChipPac, Limited (ChipPac) By: /s/ Richard Freeman ------------------------------------ Name: Dennis McKenna Title: President and CEO Address: Telephone: 408-486-5900 x5972 Facsimile: 11 EXHIBIT A TECHNICAL INFORMATION [This exhibit was never completed.] 12 EXHIBIT B PATENT APPLICATIONS [This exhibit was never completed.] 13 EXHIBIT C FEE SCHEDULE The [redacted *] payment will be made by ChipPAC to LSI Logic by a rebate on the EPBGA, EPBGA-M packages manufactured by ChipPAC for LSI Logic and the rebate per unit based on package body size is as follows: a) [redacted *] per unit of [redacted *] body EPBGA or EPBGA-M manufactured by ChipPAC for LSI Logic b) [redacted *] per unit of [redacted *] body of EPBGA or EPBGA-M manufactured by ChipPAC for LSI Logic c) [redacted *] per unit of [redacted *] body of EPBGA manufactured by ChipPAC for LSI Logic. 14 ______________ * Confidential treatment requested. EX-10.49 7 dex1049.txt LICENSE AGREEMENT DATED 02/10/2000 Exhibit 10.49 LICENSE AGREEMENT This License Agreement ("Agreement") effective as of 02/10/2000 ("Effective Date"), is made by and between LSI Logic Corporation, a Delaware corporation ("LSI"), and ChipPac Limited, a corporation established pursuant to the laws of British Virgin Islands ("ChipPac") (each of whom is individually sometimes referred to as a "Party") and both of whom are collectively sometimes referred to as "Parties). RECITALS This Agreement is made with reference to the following facts and circumstances: A. Whereas LSI wishes to license to ChipPac certain Packaging Technology (as defined below) pertaining to chip scale packages ("CSP," as defined below), and ChipPac wishes to obtain such a license, according to the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and the terms, covenants and conditions contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows: 1. DEFINITIONS AND RULES OF CONSTRUCTION DEFINITIONS. In addition to the terms defined elsewhere in this Agreement, the following words and expressions shall have the meanings set forth below: 1.1 "Affiliate" of a Party means, any corporation, limited liability company, partnership or other business enterprise: (a) which owns or controls, directly or indirectly, fifty percent (50%) or more of the voting rights with respect to the election of directors or managers, or which has practical control directly or indirectly, of any Party to this Agreement; (b) of which fifty percent (50%) or more of the voting rights with respect to the election of directors or managers is owned or controlled, directly or indirectly, by, or which is under the practical control directly or indirectly of, any Party to this Agreement; or (c) of which fifty percent (50%) or more of the total voting rights with respect to the election of directors or managers is owned or controlled, directly or indirectly, by, or which is under the practical control directly or indirectly of, any corporation, limited liability company, partnership or other business enterprise qualifying under subsections (a) or (b) above. Any corporation, limited liability company, partnership or other business enterprise which would at any time an Affiliate of LSI or ChipPac by reason of the foregoing, shall be considered an Affiliate for purposes of this Agreement only for so long as the foregoing conditions are met. 1.2 "Applicable Improvements" means any Improvements which are invented, developed, discovered or otherwise acquired by LSI before one year from "Initial Qualification", the first date that LSI qualifies ChipPac as a CSP supplier. 1.3 "ChipPac Improvements means any Improvements associated with CSP's licensed to ChipPac by LSI which are invented, developed, discovered by ChipPac before one year from "Initial Qualification", the first date that LSI qualifies ChipPac as a CSP supplier. 1.4 "Initial Qualification" refers to the first date that LSI qualifies ChipPac as a CSP supplier. 1.5 "Confidential Information" means (i) the Technical Information, in whatever form embodied; and (ii) information disclosed by either party, if disclosed in writing, that is identified and marked as confidential (or with words of similar import) at the time of its disclosure or which, if disclosed verbally, is designated confidential at the time of disclosure and is summarized and identified as confidential in a writing delivered to the receiving party on or before thirty (30) days after the disclosure; provided that Confidential Information shall in no event include any information that: (a) was known to the receiving party prior to its receipt hereunder; (b) is or becomes publicly available without breach of this Agreement; (c) is received from another without obligation of confidentiality to the disclosing party and without breach of this Agreement; or (d) is disclosed by the disclosing party to anther without an obligation of confidentiality. 1.6 "CSP" means a semiconductor device assembly ("package") characterized by having all of the following elements: (i) a substrate with a top surface and a bottom surface; (ii) a semiconductor die with an active surface and an opposing back side surface, the back side surface of the die being mounted to the top surface of the subtract, (iii) wire bonds electrically connecting the active surface of the semiconductor die to the top surface of the substrate; (iv) the bottom surface of the substrate having solder balls attached in a 0.8 mm pitch array; (v) the overall height of the assembled package being less than 1.2 mm. 1.7 "Improvements" means all developments, enhancements, modifications or betterments that may be made in the Packaging Technology or Technical Information, or that is otherwise useful with respect to the manufacture or design of a CSP, whether or not patented, patentable, copyrighted or copyrightable. 1.8 "Intellectual Property Rights" means (a) all Patent Rights; (b) all copyrights and all other literary property and author rights, and all rights, title and interest in and to all copyrights, copyright registrations certificates of copyrights and copyrighted interests; and (c) all rights, title and interest in and to all trade secrets and trade secret rights. 1.9 "LSI's Intellectual Property Rights" means: (i) all copyright and trade secret rights owned by LSI that (or licensed to LSI with the right to grant sublicenses thereunder without payment of royalties to any third party), absent the license herein, would be necessarily 2 and unavoidably infringed or misappropriated by the exploitation (as permitted herein) of the Technical Information; and (ii) all patents that issue from the applications listed in Exhibit B, including any reissue, division, term extension, continuation or continuation-in-part (to the extent the claims of such continuation in part are supported by a specification of an application listed in Exhibit B) of any such applications. 1.10 "Packaging Technology" means LSI's technology for use in packaging integrated circuits as described in the Technical Information. 1.11 "Patent Rights" means any patent rights, letters patent and applications for letters patent, or other government-issued or granted indicia of invention ownership, including any reissue, division, term extension, continuation or continuation-in-part. 1.12 "Technical Information" means the materials described in Exhibit A. 2. LICENSE AND TECHNOLOGY TRANSFER 2.1 License Grant. Subject to the terms and conditions of this ------------- Agreement, LSI agrees to grant and does hereby grant to ChipPac, a personal, non-exclusive, non-transferable right and license (with the right to grant sublicenses to the manufacturing companies that are ChipPac Affiliates according to the terms of Section 2.3) under LSI's Intellectual Property Rights to use the Packaging Technology and the Technical Information and Applicable Improvements for the purposes of manufacturing, using, selling and importing CSPs worldwide. 2.2 No Sublicenses; No Rights in Trade Marks; No Implied Licenses. The ------------------------------------------------------------- license granted pursuant to Section 2.1 shall not be sublicensed by ChipPac (other than to its Affiliates according to the terms of Section 2.3) and will convey no right to ChipPac to use or register any trademarks, service marks, or trade names of LSI or of its Affiliates. Nothing herein shall be construed as committing LSI to convey to ChipPac either expressly or by implication, any right under any letters patent or other Intellectual Property Rights of LSI, or any right to use any Technical Information, except as explicitly set forth in Section 2.1 2.3 Have Made Rights Excluded. "Have-made" rights are not included in ------------------------- the license granted under Section 2.1. Accordingly, ChipPac shall not have the right to have CSPs made for it by a third party at a third party's manufacturing facility or elsewhere without the prior written approval of LSI, which approval LSI may withhold in its sole and absolute discretion. Notwithstanding the foregoing, this provision shall not preclude any ChipPac Affiliate (e.g., CPK, CPS, CPI) from manufacturing CSP's according to the license set forth in Section 2.1, provided that each such Affiliate agrees in writing to terms and conditions no less protective of LSI than those set forth in this Agreement. ChipPac shall be fully liable to LSI for any breach by any such Affiliate of such terms and conditions. 2.4 Marking. ChipPac shall comply with all pertinent patent marking ------- statutes with respect to any patents that are part of LSI's Intellectual Property, provided that LSI provides adequate information to ChipPac to enable ChipPac to comply with such statutes. 2.5 Ownership. As between the Parties, LSI shall retain ownership of --------- the Packaging Technology, Technical Information, and all of LSI's Intellectual Property Rights. 3 3. IMPROVEMENTS ChipPac hereby grants LSI a non-exclusive, fully paid-up, royalty-free, perpetual, irrevocable, worldwide license under all pertinent Intellectual Property Rights in and to ChipPac Improvements to make, have made, use and sell packaging for semiconductor products, with the right to grant sublicenses therefore to any one or more of LSI's Affiliates and to persons that do not compete with ChipPac or its Affiliates. Upon LSI's request, ChipPac will provide LSI with all pertinent know-how regarding any "ChipPac Improvements." 4. TECHNOLOGY TRANSFER On or before February 15, 2000, LSI will provide ChipPac the Technical Information. LSI will provide a reasonable amount of technical support, not to exceed 320 man hours, to assist ChipPac or a ChipPac Affiliate with implementing the Technical Information. ChipPac shall bear all out of pocket expenses LSI incurs in connection with such technical support. 4.1 Fees. In consideration of the right and license to use the ---- Packaging Technology and the associated Technical Information grants in Section 2.1, ChipPac shall pay to LSI U.S. [redacted *] according to the schedule set forth in Exhibit C. Payments shall be non-refundable. 4.2 Interest on Late Payments. Any payment not received by LSI in ------------------------- immediately available funds by the fifth (5th) business day following any date by which such payment is due shall bear interest from such due date until paid in full by ChipPac to LSI at the annual rate equal to the prime rate (as reported by the Wall Street Journal on the date that the payment was first due); provided, however, that in no event shall such interest rate exceed the highest rate permissible under applicable law. 4.3 Taxes. All taxes imposed as a result of any payments made pursuant ----- to this Article 4.1 shall be paid by the Party required to do so by applicable law; provided, however, that if so required by applicable law and any relevant tax treaty, ChipPac shall (i) withhold the amount of any national or federal income taxes levied by the government in question, on the payments to be made pursuant to this Article 4.1, and (ii) promptly effect payment thereof to the appropriate taxing authorities; and (iii) transmit to LSI officials tax receipts or other evidence issued by said appropriate taxing authorities sufficient to enable LSI to support a claim for the appropriate income tax credit in respect of any such taxes so withheld and paid to the governments in question. 4.4 Verification. ChipPac shall provide LSI with reasonable access to ------------ ChipPac's facilities and applicable records to reasonably enable LSI to determine if any of the events set forth in Exhibit C have occurred. 5. WARRANTIES AND REPRESENTATIONS 5.1 General Warranties and Representations. Each Party warrants and -------------------------------------- represents to, and covenants with, the other Party that all corporate action necessary for the authorization, execution and delivery of this Agreement by such Party and the performance of its obligations hereunder has been taken. 4 ____________ * Confidential treatment requested. 5.2 Disclaimer. EXCEPT AS OTHERWISE PROVIDED IN SECTION 5.3, LSI ---------- DISCLAIMS ANY AND ALL EXPRESS WARRANTIES, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NONINFRINGEMENT, PERTAINING TO THE PACKAGING TECHNOLOGY, TECHNICAL INFORMATION, OR ANY OTHER TECHNOLOGY PROVIDED BY LSI HEREUNDER. Without limiting the foregoing, nothing in this Agreement shall be deemed to be a warranty or representation, either express or implied, that: (i) LSI or its Affiliates will continue to develop the Packaging Technology; and (ii) that LSI will enforce LSI's Intellectual Property Rights against any third party. LSI shall have no liability whatsoever to ChipPac in the event that ChipPac is unable to successfully implement the Packaging Technology. 5.3 Limited Intellectual Property Warranties. LSI warrants and ---------------------------------------- represents to ChipPac that as of the Effective Date for the Packaging Technology, (i) the Packaging Technology and the associated Technical Information do not impermissibly include any trade secrets or copyrighted material of any third party; and (ii) no third party has notified LSI that the Packaging Technology infringes its patents. To the extent LSI owns a patent that is part of LSI's Intellectual Property Rights, LSI has the right to license such patent pursuant to this Agreement. ChipPac warrants and represents to LSI that any and all ChipPac Improvements provided by ChipPac to LSI will not impermissibly include any trade secrets or copyrighted material of any third party. 6. LIMITATION ON DAMAGES NEITHER PARTY SHALL BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL LOSS OR DAMAGE (INCLUDING, WITHOUT LIMITATION, LOSS OF PROFITS AND LOSS OF USE) SUFFERED BY THE OTHER PARTY ARISING FROM OR RELATING TO THE PERFORMANCE, NON-PERFORMANCE, BREACH OF OR DEFAULT UNDER A COVENANT, WARRANTY, REPRESENTATION, TERM OR CONDITION OF THIS AGREEMENT, PROVIDED THAT THE FOREGOING SHALL NOT APPLY TO ANY BREACH BY CHIPPAC OF THE LICENSE GRANTED HEREIN OR THE IMPROPER USE OR DISCLOSURE BY CHIPPAC OR ITS AFFILIATES OF THE PACKAGING TECHNOLOGY TECHNICAL INFORMATION, AND/OR APPLICABLE IMPROVEMENTS. LSI'S AGGREGATE LIABILITY ARISING FROM OR RELATING TO LSI'S PERFORMANCE, NON-PERFORMANCE, BREACH OF OR DEFAULT UNDER A COVENANT, WARRANTY, REPRESENTATION, TERM OR CONDITION OF THIS AGREEMENT, SHALL NOT EXCEED THE PAYMENTS IT HAS RECEIVED FROM CHIPPAC HEREUNDER. EXCEPT AS EXPLICITLY SET FORTH ABOVE, THE LIMITATIONS ON LIABILITY AND DAMAGES SET FORTH ABOVE APPLY TO ALL CAUSES OF ACTION THAT MAY BE ASSERTED HEREUNDER, WHETHER SOUNDING IN BREACH OF CONTRACT, BREACH OF WARRANTY, TORT, PRODUCT LIABILITY, NEGLIGENCE OR OTHERWISE. IN NO EVENT SHALL LSI BE LIABLE FOR THE COST OF PROCUREMENT OF SUBSTITUTE TECHNOLOGY. 5 7. THIRD PARTY CLAIMS 7.1 Intellectual Property Rights. Subject to (a) the limitations set forth ---------------------------- in Article 6 and in this Article 7, each Party ("Defending Party") shall defend and settle any claim, demand, cause of action, loss, damage, liability, fine, penalty, cost or expense (each, a "Claim") brought against the other Party ("Defended Party") arising our of a breach of the Defending Party's warranties and representations set forth in Section 5.3 and pay all damages to the extent attributable to such breach that are awarded pursuant to such Claims. As a condition of the Defending Party's obligations set forth in the preceding sentence, the Defended Party shall give the Defending Party prompt written notice of any such Claims as described in the first sentence of this Section, full authority to defend and settle such Claims and all reasonable assistance to the Defending Party (at the Defending Party's expense) as may be requested by Defending Party. If, as a result of a Claim for which LSI is the Defending Party, ChipPac becomes enjoined from using the Packaging Technology or if LSI reasonably believes such a Claim may be initiated: (a) LSI shall (i) procure for ChipPac the right to use the Packaging Technology; (ii) provide ChipPac with replacement technology (which shall become Packaging Technology) that is non-infringing that is a reasonable substitute for the infringing Packaging Technology; or (iii) if neither (i) nor (ii) is commercially feasible, terminate ChipPac's license hereunder and if such termination occurs within eight years from the Effective Date, refund a fraction of all payments made under Article 5, the numerator of the fraction equal to the number of days between the date of such termination and the date that is eight years from the Effective Date, the denominator equal to eight (8) years. In cases (ii) and (iii) above, ChipPac will immediately cease using the Packaging Technology in question upon receiving written notice from LSI. In the case where ChipPac is the Defending Party, the Defended Party shall include LSI's Affiliates. THIS SECTION STATES THE ENTIRE LIABILITY OF EACH PARTY AND THE EXCLUSIVE REMEDY OF EACH PARTY WITH RESPECT TO INFRINGEMENT. EXCEPT AS EXPRESSLY STATED IN THIS SECTION 7.1, ALL WARRANTIES AGAINST INFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHTS, STATUTORY, EXPRESS OR IMPLIED ARE HEREBY DISCLAIMED. 7.2 Exclusions. LSI shall have no obligation under Section 7.1 arising out ---------- of or relating to the continued use of any infringing technology after LSI has provided ChipPac with written notice pursuant to Section 7.1 to cease such use. Furthermore, ChipPac will defend and indemnify LSI from and against any liability, damages, cost or expense (including attorney's fees) arising out of any such Claim asserted against LSI arising out of or relating to any act or condition described in the preceding sentence; provided, however, that such duty of indemnity shall be conditioned upon LSI giving ChipPac prompt written notice of any such Claims, full authority to defend and settle such Claims and all reasonable assistance to ChipPac (at ChipPac's expense) as may be requested by ChipPac. 7.3 Notice. Each Party ("Notifying Party") shall provided the other Party ------ ("Notified Party") with written notice promptly after learning of any allegations that the Notifying Party's use or exploitation of any technology provided by the Notified Party hereunder infringes or misappropriates any third party's Intellectual Property Rights. To the extent that any Claims arising our of such allegations do not arise out of the Notified Party's warranties pursuant to Section 5.3, the Notified Party shall have the right, but not the obligation, to assist in the defense of any such Claims. If LSI is the Notified Party, LSI will (i) provide ChipPac with all pertinent 6 information regarding LSI's creation of the Packaging Technology and (iii) make the pertinent LSI employees available to ChipPac to assist ChipPac (and its attorneys) with interpreting and verifying such information. 7.4 High Risk Activities: Indemnity. The Packaging Technology is not ------------------------------- intended to create packaging for products that will be used in medical or aviation activities or in other high risk activities. 8. ENFORCEMENT ChipPac shall not have the right to enforce any of LSI's Intellectual Property Rights. In the event that ChipPac learns that any third party is infringing or misappropriating any of LSI's Intellectual Property Rights, ChipPac shall promptly thereafter provide LSI with written notice regarding such infringement or misappropriation. 9. TERM; DEFAULT AND TERMINATION; EFFECT OF TERMINATION 9.1 Term. Unless sooner terminated pursuant to the early termination ---- provisions hereof, this Agreement shall be effective upon the Effective Date and shall continue in effect unless earlier terminated as described below. 9.2 Termination for Default. If either Party defaults on a material ----------------------- provision and does not cure such default within forty-five (45) days after written notice thereof is received from the other Party, such other Party shall have the right at its option to terminate the Agreement. 9.3 Insolvency. Should either Party: (a) become insolvent; (b) make an ---------- assignment for the benefit of creditors; (c) file or have filed against it a petition in bankruptcy or seeking reorganization; (d) have a receiver appointed; or (e) institute any proceedings for liquidation or winding up; then the other Party may, in addition to other rights and remedies it may have, terminate the Agreement or any purchase orders placed under the Agreement immediately by written notice. 9.4 Breach of Confidentiality. The Parties stipulate that the arbitration ------------------------- provisions of Section 12.11 shall not apply to any temporary restraining order, injunctive relief, protective order or other provisional remedy sought to prohibit a breach or threatened breach of the provisions of Section 11.1. 9.5 Rights and Remedies; Termination of Certain Provisions. The ------------------------------------------------------ termination of this Agreement shall be without prejudice to (a) the right of LSI to receive upon its request all payments accrued and unpaid hereunder; (b) the rights and remedies of any Party with respect to the current or any previous breach of any other representations, warranties, covenants, terms, conditions or provisions of this Agreement (provided that the limitation on liability set forth in Article 6 shall apply to such rights and remedies); (c) any rights to indemnification set forth herein; (d) unless this Agreement is terminated due to LSI's material breach, the grant-back license from ChipPac to LSI in ChipPac's improvements under Article 3; and (e) any other provisions hereof which expressly or necessarily call for performance after the termination of this Agreement. 7 9.6 Termination of ChipPac's Rights Upon Default. Immediately upon and -------------------------------------------- after termination (by either Party) of this Agreement, ChipPac shall (a) cease making, marketing, using and selling of SCPs covered by this Agreement; (b) cease its use of any and all Packaging Technology and Technical Information provided throughout this license; and (c) return to LSI all media containing Technical Information and copies thereof and all other materials and date of ChipPac which contains or are based on the Process Technologies. 10. ADDITIONAL BANKRUPTCY PROVISIONS 10.1 Generally. This is a contract under which applicable law excuses LSI --------- from accepting performance from or rendering performance to ChipPac within the meaning of sections 365(c) and 365(e)(2) of the Bankruptcy Code, 11 U.S.C. Secs. 365 (c), 365(e)(2). Accordingly, in the event of ChipPac's bankruptcy, this Agreement cannot be assumed or assigned without LSI's express written consent. 10.2 Assumption. In the event LSI consents to assumption and assignment of ---------- this Agreement, any person or entity to which this Agreement is assigned pursuant to the provisions of the Bankruptcy Code, 11 U.S.C. Section 101 et seq., shall be deemed without further act or deed to have assumed all of the obligations arising under this Agreement on and after the date of such assignment. Any such assignee shall upon demand execute and deliver to LSI an instrument confirming such assumption. 10.3 Lifting of Stay. In the event that ChipPac is the subject of any --------------- insolvency, bankruptcy, reorganization, or similar proceeding under the United States Bankruptcy Code, voluntarily or involuntarily, the Parties stipulate that LSI is entitled to the automatic and absolute lifting of the automatic stay as to the enforcement of its remedies under this Agreement, including specifically but not limited to the stay imposed by 11 U.S.C. Section 362, as amended; ChipPac hereby consents to the immediate lifting of any such automatic stay, and will not contest any action by LSI to lift such stay; ChipPac expressly acknowledges that it has no equity in the license and rights granted under this Agreement. 11. CONFIDENTIALITY 11.1 Obligation. Each Party agrees to maintain in confidence the other ---------- Party's Confidential Information. Neither Party shall disclose the other Party's Confidential Information to any other person or organization without the prior written consent of the other Party. Each Party shall protect such information from disclosure to others with at least the same degree of case as such Party exercises to protect its own information of similar type and importance provided that the degree of care exercised with respect to Confidential Information that is Technical Information shall in no event be less than a high degree of care. Each Party shall disclose the other Party's Confidential Information only to those employees of the receiving Party that have a need to know such information. Neither Party shall use the other Party's Confidential Information except as expressly permitted in this Agreement. The obligations of confidentiality and protection required by this section shall survive the expiration, termination or cancellation of this Agreement for a period of five (5) years, provided that the obligations with respect to Confidential Information that is Technical Information shall survive in perpetuity. 8 11.2 Third Party Request for Information. Except as otherwise provided in ----------------------------------- this Agreement, either Party shall immediately notify the other Party of any private or governmental request for secret or confidential information (including, without limitation, Confidential Information) or any other information or documents relating to this Agreement. Each Party shall have the right to participate in any other Party's response to any such request. In the event that a Party receives any subpoena or other legal process requiring the production of information, documents, data, work papers, reports, or other materials relating to any secret or confidential information (including, without limitation, Confidential Information) or to this Agreement, that party shall: (a) give the other Party, if possible, the opportunity to participate in quashing, modifying or otherwise responding to any compulsory process in an appropriate and timely manner; and (b) cooperate fully with the other Party's efforts to narrow the scope of any such compulsory process, to obtain a protective order limiting the use or disclosure of the information sought, or in any other lawful way to obtain continued protection of the secret or confidential information. 11.3 Notice. If either Party ("First Party") becomes aware of the loss, ------ theft or misappropriation of the other Party's Confidential Information which is in the First Party's possession or control, the First Party shall notify the other Party in writing within five (5) days of its discovery of such loss, theft or misappropriation. 11.4 Terms Confidential; Publicity. Neither Party shall disclose the terms ----------------------------- and conditions of this Agreement to any third party without the other Party's prior written consent, except to the extent required by applicable governmental authorities. Notwithstanding the foregoing, each Party shall have the right to disclose this Agreement to its attorneys, accountants and like personnel, and to potential investors or acquirors, and for SEC filings, IPO events under reasonable conditions of confidentiality. ChipPac agrees to issue joint press announcements with LSI promptly after the Effective Date and promptly after Initial Qualification. Each party must approve of the content of such announcements before they are released. Neither party shall otherwise issue a press release regarding this Agreement without the other Party's prior written consent. 12. GENERAL PROVISIONS 12.1 Assignment. ChipPac shall not assign any of its rights or privileges ---------- to any person (including its Affiliates) hereunder, whether by operation of law or otherwise (including, without limitation, by merger with or acquisition by a third party) without the prior written approval of LSI, which approval LSI shall not unreasonably withhold. Any attempted assignment in violation of this Section 12.1 shall be null and void ab initio. LSI shall have the unrestricted right to assign this Agreement to any person, in which case the definition of "LSI's Intellectual Property Rights" shall include only those Intellectual Property Rights licensed hereunder prior to the effective date of any such assignment. 9 12.2 Controlling Law. This Agreement shall be construed and interpreted in --------------- accordance with the law of the State of California (except its choice of law rules) as though made by two parties residing in California so as to be fully performed within that State. 12.3 Export Controls. ChipPac shall comply with all export control laws --------------- and regulations of the United States of America. 12.4 Waiver. No failure or delay on the part of either party in the ------ exercise of any right or privilege hereunder shall operate as a waiver thereof or of the exercise of any right or privilege hereunder, nor shall any single or partial exercise of any such right or privilege preclude other or further exercise thereof or of any other right or privilege. 12.5 Notice. Any notice or claim provided for herein shall be in writing ------ and shall be given (i) by personal delivery, effective upon delivery, (ii) by first class mail, postage prepaid, addressed to the address first stated above for the recipient, effective one (1) business day after proper deposit in the mail, or (iii) by facsimile directed to the facsimile number first indicated above for the recipient, but only if accompanied by mailing of a copy in accordance with (ii) above, effective as of the date of facsimile transmission. 12.6 Severability; Several Rights and Obligations. If any provision of -------------------------------------------- this Agreement is held to be ineffective, unenforceable or illegal for any reason, such decision shall not effect the validity or enforcement of any or all of the remaining portions thereof. If more than one Product is covered under this Agreement, then the rights and obligations of the parties as to each such Product shall be several and independent from those as to any other Product. 12.7 Other Rights. Nothing contained in this Agreement shall be construed ------------ as conferring by implication, estoppel or otherwise upon either party or any third party any license or other right except, solely as to the parties hereto, the rights expressly granted hereunder. 12.8 Publicity. All notices to third parties and all other publicity --------- concerning the transactions contemplated by this Agreement shall be jointly planned and coordinated by and between the parties. Neither of the parties shall act unilaterally in this regard without the prior written approval of the other party; however, this approval shall not be unreasonably withheld. 12.9 Titles. Any titles included herein are for convenience only and are ------ not to be used in the interpretation of this Agreement. 12.10 Integration; Modification. This Agreement, together with the Exhibits ------------------------- hereto, embodies the final, complete and exclusive statement of the terms of their agreement with respect to the subject matter hereof and supersedes any prior or contemporaneous representations, descriptions, courses of dealing or agreements as to such subject matter. No amendment or modification of this Agreement or any Exhibit hereto shall be valid or binding upon the parties unless in writing and signed by an officer of each party, and NO EMPLOYEE OF EITHER PARTY OR REPRESENTATIVE HAS ANY AUTHORITY OTHERWISE TO BIND EITHER PARTY TO ANY OBLIGATION OR LIABILITY NOT EXPRESSLY STATED HEREIN. 10 12.11 Arbitration. Any dispute relating to the enforceability, ----------- interpretation of performance of this Agreement (other than claims for which injunctive relief is sought), or relating to the parties' relationship or any transactions between them arising out of this Agreement, shall be resolved at the request of either party through binding arbitration in San Francisco, California; provided, however, that it shall not be deemed a waiver of the right to arbitrate for a party to seek, nor shall this Agreement be interpreted to preclude a party from seeking, in a court of competent jurisdiction, temporary or preliminary injunctive relief pending entry of judgment on any arbitration award, or other appropriate prejudgment relief. Any discovery shall be conducted in accordance with the Federal Rules of Civil Procedure. Except as otherwise expressly provided herein, arbitration shall be conducted in accordance with the Commercial Rules of the American Arbitration Association. The arbitration shall be conducted by three arbitrators. Each party will select one arbitrator, and the two arbitrators thus selected will select a third arbitrator. Judgment upon award by the arbitrators may be entered by any state or federal court having jurisdiction. 12.12 Relationship to the Parties. The relationship of the parties hereto --------------------------- is that of independent contractors. Neither party, nor its agents or employees shall be deemed to be the agent, employee, joint venturer, partner or fiduciary of the other party. Neither party shall have the right to bind the other party, transact any business in the other party's name or on its behalf or incur any liability for or on behalf of the other party. IN WITNESS HEREOF the parties have caused this Agreement to be signed by their duly authorized representatives. LSI LOGIC CORPORATION ("LSI") By: /s/ Maniam Alagaratnam -------------------------------------- Name: Maniam Alagaratnam -------------------------------------- Title: Vice President, Packaging Development -------------------------------------- Date: February 10, 2000 -------------------------------------- CHIPPAC LIMITED ("ChipPac") By: /s/ Richard Parsons -------------------------------------- Name: Richard Parsons -------------------------------------- Title: Director -------------------------------------- Date: February 16, 2000 -------------------------------------- 11 EXHIBIT A TECHNICAL INFORMATION [This exhibit was never completed.] 12 EXHIBIT B PATENT APPLICATIONS [This exhibit was never completed.] 13 EXHIBIT C FEE SCHEDULE [redacted *] within thirty days of the Effective Date. [redacted *] on completion of CSP qualification test vehicle or June 30, 2000 whichever occurs earlier. [redacted *] within sixty days after the date of Initial Qualification by LSI. All amounts are stated in U.S. currency. 14 ____________ * Confidential treatment requested. EX-10.50 8 dex1050.txt BCC LICENSE AGREEMENT EXHIBIT 10.50 Bump Chip Carrier (called "BCC" in this Agreement) LICENSE AGREEMENT -------------------------------------------------------------------- THIS BCC LICENSE AGREEMENT (hereinafter called "Agreement") made and entered into as of the 27th day of August, 2001 by and between: FUJITSU LIMITED, a Japanese corporation, having its principal place of business at 50, Fuchigami Akiruno, Tokyo 197-0833, Japan and (hereinafter called "FUJITSU"), and ChipPAC, Inc, a corporation, having its principal place of business at 47400 Kato Road, Fremont, CA 94538, USA. ("LICENSEE"). WITNESSETH THAT: WHEREAS, LICENSEE desires to assemble and sell certain semiconductor devices under certain patents and technical information of FUJITSU; and WHEREAS, FUJITSU is willing to grant LICENSEE a license to assemble and sell such semiconductor devices under certain patents and technical information of FUJITSU, subject to the terms and conditions as hereinafter set forth; NOW THEREFORE, in consideration of the above premises and mutual covenants contained herein, both parties hereto agree as follows: Article 1. Definitions 1.1 "BCC TECHNOLOGY" means the technology for assembling a semiconductor device as specified in Exhibit A attached hereto. 1.2 "PIN COUNT" means the number of pins or similar external electrical connecting means which are extended from the body of a semiconductor device. 1.3 "LICENSED PRODUCT(S)" means a semiconductor device which uses BCC TECHNOLOGY and PIN COUNT of which is less than one hundred (100). 1.4 "SUBSIDIARY(IES)" means any corporation, company or other entity more than fifty percent (50%) of whose voting stock or other similar interests are owned or controlled by either party hereto, directly or indirectly, now or hereafter, but such corporation, company or other entity shall be deemed to be a SUBSIDIARY only so long as such ownership or control exists. 1.5 "EFFECTIVE DATE" means the date when FUJITSU and LICENSEE mutually execute this Agreement or the date when all the governmental authorizations if required for the execution and performance hereof are obtained, whichever date comes later. 1.6 "FUJITSU DELIVERABLES" means the documents written in English as set forth in Exhibit B attached hereto. 1.7 "TRAINING" means a technical training of BCC TECHNOLOGY specified in Exhibit C attached hereto. 1 1.8 "FUJITSU KNOW-HOW" means any technique, know-how or other information relating to BCC TECHNOLOGY, whether tangible or not, furnished or disclosed by FUJITSU to LICENSEE hereunder. 1.9 "FUJITSU PATENTS" means all patents, utility models and applications therefor directly and specifically covering to BCC TECHNOLOGY in all countries of the world, which are issued, published or filed prior to the EFFECTIVE DATE, in respect of which, as of EFFECTIVE DATE or thereafter during the term of this Agreement, FUJITSU'S SEMICONDUCTOR GROUP owns or controls, and has the right to grant licenses of the scope granted herein without such grant resulting in the payment of royalties or other consideration to third parties. For the purpose of this Agreement, "FUJITSU'S SEMICONDUCTOR GROUP" means the FUJITSU division within the Electronic Devices Sector that assembles and/or develops products falling within the definition of LICENSED PRODUCTS. This definition of FUJITSU'S SEMICONDUCTOR GROUP shall include any FUJITSU future business unit derived therefrom, by separation or merger, irrespective of appellation. 1.10 "FUJITSU TECHNOLOGY" means FUJITSU DELIVERABLES, FUJITSU KNOW-HOW and FUJITSU PATENTS. Article 2. Grant of License 2.1 Subject to the payment of the compensation under Article 4 below, FUJITSU hereby grants to LICENSEE during the term of this Agreement a non-transferable, non-exclusive and world-wide license, with the right to grant sub-licenses only to LICENSEE's SUBSIDIARIES, under FUJITSU TECHNOLOGY to assemble (but not to have assembled) LICENSED PRODUCTS , and to use, sell, lease or otherwise dispose of such LICENSED PRODUCTS 2.2 The license granted to LICENSEE under Article 2.1 above includes the right of LICENSEE to use, improve or modify FUJITSU TECHNOLOGY for the improvement or modification in LICENSED PRODUCTS relating to BCC TECHNOLOGY. 2.3 LICENSEE and its SUBSIDIARIES sublicensed hereunder hereby grant to FUJITSU a non-transferable, non-exclusive, world-wide and royalty-free license to assemble LICENSED PRODUCTS, and to use, sell, lease or otherwise dispose of such LICENSED PRODUCTS, under all patents, utility models and applications therefor directly and specifically covering BCC TECHNOLOGY in all countries of the world, which are issued, published or filed prior to the date of termination or cancellation of this Agreement, in respect of which, as of EFFECTIVE DATE or thereafter during the term of this Agreement, LICENSEE may own or control such license, provided they clearly do not include any FUJITSU TECHNOLOGY, shall continue for the lives of said separate patents and utility models. LICENSEE and its SUBSIDIARIES sublicensed hereunder hereby also grant to FUJITSU the right to grant sub-license to FUJITSU's SUBSIDIARIES and the third parties under the licenses granted to FUJITSU under this Article 2.3. 2 2.4 It is confirmed by the parties hereto that no licenses or rights are granted under this Agreement with regard to lead frames even though they are used or to be used in assembling LICENSED PRODUCTS. Article 3. Disclosure and Assistance 3.1 FUJITSU shall , without undue delay after the receipt of compensation by LICENSEE pursuant to Article 4.1 a) (1) below, (i) furnish FUJITSU DELIVERABLES to LICENSEE and (ii) discuss with LICENSEE and determine the details of TRAINING. 3.2 LICENSEE may dispatch three (3) qualified engineers enough skilled and experienced in assembling semiconductor devices for TRAINING pursuant to the time schedule determined in Article 3.1 above. 3.3 FUJITSU shall provide for training staff and equipment(s) to the extent FUJITSU considers it necessary for TRAINING. 3.4 LICENSEE acknowledges that TRAINING is given without any warranty by FUJITSU. 3.5 LICENSEE shall bear all of traveling and living expenses and any other expenses which may be incurred by LICENSEE's trainees. 3.6 In case that TRAINING does not proceed because of LICENSEE's negligence, default, in-action or failure to act, FUJITSU shall disclaim all responsibility for further providing TRAINING to LICENSEE under this Agreement. 3.7 If LICENSEE wishes additional technical training of BCC TECHNOLOGY, LICENSEE and FUJITSU shall discuss separately the terms and conditions of such training. 3.8 FUJITSU shall grant LICENSEE a royalty-free and non-exclusive right to reproduce, translate and/or revise, any documents containing FUJITSU TECHNOLOGY in whole or in part subject to prior written consent of FUJITSU; provided that LICENSEE acknowledges that the copyright and any other proprietary right in or to such reproductions, translations and/or revisions shall remain with FUJITSU and further that FUJITSU shall not be responsible in any manner for whatever errors or omissions which may be contained in such reproductions, translations and/or revisions. LICENSEE shall affix the same copyright and other proprietary notices as contained in the original FUJITSU TECHNOLOGY delivered to LICENSEE hereunder to all reproductions, translations and/or revisions made by LICENSEE. Article 4. Compensation 4.1 As the result of giving full regard to the facts that LICENSEE might assemble LICENSED PRODUCTS for FUJITSU'S licensees of FUJITSU PATENTS which are granted by FUJITSU the right to have LICENSED PRODUCTS assembled under FUJITSU PATENTS, and that LICENSEE might assemble LICENSED PRODUCTS for FUJITSU and for Licensee's customers, and in consideration of the rights and licenses granted under Article 2 of this Agreement, LICENSEE shall make the following non-refundable payments to FUJITSU: 3 a) Fixed Fee: [redacted*] Licensee shall pay to FUJITSU the above fee of total [redacted*] subject to the following three installments: 1) Initial payment: [redacted*] payable within thirty (30) days after the EFFECTIVE DATE. 2) Second payment: [redacted*] payable at the end of the month following the month when the cumulative number of PIN COUNT of LICENSED PRODUCTS assembled by LICENSEE or its SUBSIDIARIES sublicensed hereunder exceeds [redacted*]. 3) Third payment: [redacted*] payable at the end of the month following the month when the cumulative number of PIN COUNT of LICENSED PRODUCTS assembled by LICENSEE or its SUBSIDIARIES sublicensed hereunder exceeds [redacted*] b) Running Royalty: Licensee shall pay to FUJITSU the running royalty of [redacted*] multiplied by PIN COUNT of LICENSED PRODUCTS assembled by LICENSEE or by its SUBSIDIARIES sublicensed hereunder. Notwithstanding the above herewith, the following reduced rate of the running royalty may be applicable during the term of this Agreement if and to the extent that the cumulative number of PIN COUNT of LICENSED PRODUCTS assembled by LICENSEE or its SUBSIDIARIES sublicensed hereunder, which cumulative number is calculated from the EFFECTIVE DATE of this Agreement, achieves the following: Cumulative number of PIN COUNT Reduced rate ------------------------------ ---------------------- Exceeding [redacted*] U.S. [redacted*] Exceeding [redacted*] U.S. [redacted*] After ten (10) years have passed from the Effective Date, LICENSEE may assemble LICENSED PRODUCTS [redacted*] of the foregoing running royalty so far as this Agreement is effective. Notwithstanding the above, no royalty or other payment will be made in the case of LICENSED PRODUCTS assembled for FUJITSU or its SUBSIDIARIES. 4.2 The running royalty shall be computed semi-annually as of the last day of June and December of each year and shall be paid to FUJITSU within thirty (30) days after the respective dates. 4.3 LICENSEE shall, at the time of each payment of the running royalty, submit to FUJITSU a royalty report, which shall describe the quantity of LICENSED PRODUCTS assembled by LICENSEE or its SUBSIDIARIES sublicensed hereunder and categorized by each package configuration, total ______________________ * Confidential treatment requested. 4 numbers of PIN COUNT of such LICENSED PRODUCTS by each such configuration, royalty amount, and tax withheld, for each six month period and the cumulative number of PIN COUNT from the EFFECTIVE DATE. Such royalty report shall be sent by LICENSEE to FUJITSU's address set forth in Article 17 below. Licensee shall submit such royalty report even in the event that no assembly of LICENSED PRODUCTS by and its SUBSIDIARIES sublicensed hereunder takes place in a certain semi-annual period Article 5. Payment 5.1 Payments hereunder shall be made without deductions of taxes, assessments, or other charges of any kind of which may be imposed on FUJITSU by the Government of the United States of America or any political subdivision thereof with respect to any amounts due to FUJITSU pursuant to this Agreement, and such taxes, assessments or other charges shall be paid by LICENSEE. However, income taxes or taxes of similar nature imposed on FUJITSU on account of the payment hereunder by the Government of the United States of America or any political subdivision thereof and paid by LICENSEE for the account of FUJITSU shall be deductible from the royalty payment due to FUJITSU to the extent that such taxes are allowable as a credit against taxes imposed on FUJITSU by the Government of Japan. To assist FUJITSU in obtaining tax credit, LICENSEE shall furnish FUJITSU with such evidence as may be required by taxing authorities of the Government of Japan to establish that any such taxes have been paid and are allowable as the said credit. 5.2 In the event that any payment under Article 4 above is not received by the due date for payment, interest calculated from the due date of such payment until full payment shall be charged on the overdue amount at the rate equal to the prime rate of the CITIBANK N.A. in the United States on the due date of such payment plus two percent (2%) per annum. The foregoing payment of interest shall not affect FUJITSU's right to cancel this Agreement in accordance with Article 11 below. 5.3 Any payment from LICENSEE to FUJITSU hereunder shall be made by means of telegraphic transfer remittance in U.S. Dollars to: Bank: The Dai-ichi Kangyo Bank Ltd., Head Office 1-5, Uchisaiwai-cho 1-chome Chiyoda-ku, Tokyo 100-0011, Japan Account Name: FUJITSU LIMITED Account Number: 1167829 Article 6. Accounting and Audit LICENSEE shall keep records of account for LICENSEE containing true and accurate information details required for verification of the report described in Article 4.3 for each and every semi-annual period set forth in Article 4.3 for a period of three (3) years after the last day of such semi-annual period. Upon request by FUJITSU or its nominee, LICENSEE shall immediately disclose said records for inspection and answer any questions from FUJITSU or such nominee. The cost of such inspection shall be borne by FUJITSU unless such inspection reveals that LICENSEE has underpaid 5 the royalties due under this Agreement by three percent (3%) or more for any semiannual period. In case of such underpayment, LICENSEE shall pay the cost of such inspection and the deficiency plus the interest calculated in accordance with Article 5.2 above. Article 7. Warranty Nothing contained in this Agreement shall be construed as: a) a warranty or representation by FUJITSU as to the validity or scope of any FUJITSU PATENTS; b) conferring upon LICENSEE or its SUBSIDIARIES sublicensed hereunder any license, right or privilege under any patents, utility models, know-how or technical information except the licenses, rights and privileges expressly granted hereunder; c) a warranty or representation by FUJITSU that any acts licensed hereunder will be free from infringement of patents, utility models, or other intellectual property rights other than those under which licenses, rights and privileges have been expressly granted hereunder; d) an agreement to bring or institute actions or suits against third parties for infringement or conferring any right to bring or institute actions or suits against third parties for infringement; e) conferring upon LICENSEE or its SUBSIDIARIES sublicensed hereunder any right to use in advertising, publicity, or otherwise any trademark, trade name or names, or any contraction, abbreviation or simulation thereof, of FUJITSU; or f) an obligation of FUJITSU to furnish any technical information or know-how except the obligation expressly provided in this Agreement. FURTHERMORE, FUJITSU PROVIDES LICENSEE THE FUJITSU DELIVERABLES, FUJITSU KNOW-HOW AND TRAINING "AS IS" AND DOES NOT MAKE ANY WARRANTIES, WHETHER EXPRESS, IMPLIED OR OTHERWISE, CONCERNING FUJITSU TECHNOLOGY INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR WARRANTIES OF FREEDOM FROM ERRORS OR DEFECTS. Article 8 Confidential Information 8.1 LICENSEE shall use any technique, assembling know-how, and other information, including FUJITSU TECHNOLOGY, furnished or disclosed to LICENSEE by FUJITSU hereunder (hereinafter collectively called "FUJITSU CONFIDENTIAL INFORMATION") only for the purpose of assembling LICENSED PRODUCTS. No information shall be protected or treated as Fujitsu Confidential Information hereunder, unless disclosed in accordance with the following procedures: (a) if disclosed information is written, recorded, graphical or otherwise in a tangible form it shall be labeled as "Proprietary," "Confidential," or with a similar legend denoting confidentiality; and (b) if information is orally and/or visually disclosed it shall be identified as confidential at the time of its disclosure and a written memorandum identifying such information in summary form and stating the same to be confidential shall be delivered to recipient within thirty (30) days of the oral or visual disclosure. 6 Until the fifth (5th) anniversary date of the termination or cancellation of this Agreement, LICENSEE shall keep and cause to be kept FUJITSU CONFIDENTIAL INFORMATION in strict confidence from any third party. LICENSEE shall not file any application for or obtain, any intellectual property rights using or including FUJITSU CONFIDENTIAL INFORMATION, without FUJITSU's prior written consent. 8.2 LICENSEE may disclose in whole or in part FUJITSU CONFIDENTIAL INFORMATION to only its limited officers and employees who have a need-to-know. All obligations on the part of LICENSEE stipulated in Article 8.1 hereof shall extend to the officers and employees of LICENSEE who have access to FUJITSU CONFIDENTIAL INFORMATION, and for the purpose LICENSEE shall take all reasonable precautions in order to ensure the compliance of its obligation under this Agreement. 8.3 Notwithstanding Article 8.1 above, LICENSEE may disclose FUJITSU CONFIDENTIAL INFORMATION to LICENSEE's SUBSIDIARIES sublicensed hereunder, only to the extent necessary for such SUBSIDIARIES to assemble LICENSED PRODUCTS. 8.4 Each party hereto shall keep the existence and terms of this Agreement in strict confidence, and shall not, directly or indirectly, disclose any of the existence and terms of this Agreement to any third party except: a) with the prior written consent of the other party; b) to any governmental body having jurisdiction to request and to review the same; c) as otherwise may be required by law; or d) to legal counsel representing the parties hereto. 8.5 In case FUJITSU or LICENSEE should sustain any damage due to causes attributable TO OTHER PARTY under this AGREEMENT , THE OFFENDING PARTY shall compensate THE OTHER PARTY for all losses, damages, costs, charges, expenses and attorney fees, BUT SAID COMPENSATION NOT TO EXCEED [redacted*] However, in no event will EITHER PARTIES be liable for any lost revenues, lost profits, incidental, indirect, consequential, special or punitive damages. 8.6 Notwithstanding the foregoing provisions of this Article 8, the following information shall not be deemed FUJITSU CONFIDENTIAL INFORMATION: a) Information that is in the public domain at the time of FUJITSU's disclosure thereof to LICENSEE; b) Information that falls into the public domain through no act or failure to act on the part of LICENSEE subsequent to the time of FUJITSU's disclosure thereof to LICENSEE; c) Information that is already in the possession of LICENSEE at the time of FUJITSU's initial disclosure thereof to LICENSEE; d) Information that is independently developed by LICENSEE on or after FUJITSU's disclosure thereof to LICENSEE; or e) Information that is rightfully received by LICENSEE from any third party and not under obligation of confidentiality on or after FUJITSU'S disclosure thereof to LICENSEE. Article 9. Most Favored Terms ____________________ *Confidential treatment requested. 7 Each time FUJITSU or it's SUBSIDIARIES requests LICENSEE to assemble LICENSED PRODUCTS for FUJITSU or such SUBSIDIARIES, LICENSEE shall give FUJITSU or such SUBSIDIAIRIES a priority allocation for such LICENSED PRODUCTS under the most favored price. Article 10. Term and Termination 10.1 This Agreement shall come into force and effect on the EFFECTIVE DATE. 10.2 The term of this Agreement shall be five (5) years from the EFFECTIVEDATE. 10.3 Subsequent to the five (5) years set forth in Article 10.2 above, the term of this Agreement shall be extended on annual basis, subject to the governmental authorizations required for the extension, unless either party hereto gives to the other party a notice to terminate this Agreement in writing at least six (6) months prior to the end of the then current five-years or one-year term of this Agreement. 10.4 Both parties hereto may terminate this Agreement at any time upon mutual agreement for the purpose of mutual benefit of the parties. Article 11. Cancellation of Agreement 11.1 Notwithstanding Articles 10.3 and 10.4 above, each party hereto may cancel this Agreement forthwith by giving a written notice to the other party in the event of one or more of the following: a) the filing by such other party of a petition in bankruptcy or insolvency; b) the filing by any third party of a petition in bankruptcy or insolvency against such other party, unless such filing is set aside, dismissed or withdrawn or ceased to be in effect within thirty (30) days from the date of such filing; c) the filing by such other party of any legal action or document seeking reorganization, readjustment or arrangement of such other party's business under any law relating to bankruptcy or insolvency; d) the appointment of a receiver or bankruptcy trustee for all or substantially all of the property of such other party; e) the making by such other party of any assignment for the benefit of creditors; f) the institution of any proceedings for the liquidation or winding up of such other party's business or for the termination of its corporate charter; g) any important change affecting substantially the ownership or control of such other party, including a change of major stock holder; or h) failure to correct or cure any breach by such other party of any covenant or obligation under this Agreement within thirty (30) days after receipt by such other party of a written notice from the first-mentioned party specifying such breach. 11.2 In addition to Article 11.1 above, in the event that: a) LICENSEE comes under direct or indirect control by a third party; b) LICENSEE consolidates with or merges with or into another corporation, partnership, or other entity, whether or not LICENSEE is the surviving entity of such transaction; or 8 c) LICENSEE sells, assigns or otherwise transfers all or substantially all of LICENSEE's assets or semiconductor assembly business to a third party; and such event(s) is judged by FUJITSU after careful consideration to be detrimental to FUJITSU, FUJITSU may cancel this Agreement upon thirty (30) days' advance written notice to LICENSEE. Article 12. Effect of Termination or Cancellation 12.1 All license and rights granted to LICENSEE under Article 2 hereof shall cease on the date of termination or cancellation of this Agreement. (The ceasing, under this Article 12.1, of the license and rights granted to LICENSEE under Article 2 hereof is hereinafter called "LICENSE CEASING".) 12.2 In case of LICENSE CEASING, LICENSEE shall, in accordance with the instruction of FUJITSU, promptly return to FUJITSU all tangible FUJITSU TECHNOLOGY received from FUJITSU under this Agreement including all copies thereof. 12.3 Upon termination or cancellation of this Agreement, any of LICENSED PRODUCTS in the process of assembly hereunder shall be deemed as assembled on the day of such termination or cancellation. Promptly, but not later than thirty (30) days, after termination or cancellation of this Agreement, LICENSEE shall pay the running royalty and send the final royalty report to FUJITSU. 12.4 Notwithstanding the provision of Article 12.1 above, and subject to the provisions of Article 12.3 above, LICENSEE may, after LICENSE CEASING, assemble LICENSED PRODUCTS which are in the process of assembly, and use, sell, lease or otherwise dispose of them subject to the after payment of royalty described in Article 12.3. 12.5 No termination or cancellation of this Agreement shall release either party from any liability which at the time of termination or cancellation has already accrued, or shall in any way affect the survival of any right, duty or obligation of either party which is contemplated to be performed as of the date of or after such termination or cancellation. Article 13. Export/Import License LICENSEE shall ensure that the distribution, export and import of FUJITSU TECHNOLOGY or LICENSED PRODUCTS are in compliance with all laws, regulations, orders or other restrictions of the government(s) of Japan, the United States of America and/or other countries from which FUJITSU TECHNOLOGY or LICENSED PRODUCTS are exported by LICENSEE . LICENSEE agrees that LICENSEE shall not export or re-export any FUJITSU TECHNOLOGY or LICENSED PRODUCTS to any country for which such government(s) or any of its agencies requires an export license or other governmental approval without first obtaining such license or approval. Article 14. Assignment Neither party hereto shall, voluntarily or by operation of law, in whole or in part, assign or otherwise transfer this Agreement or any of rights or obligations created thereunder without the prior written consent of the other party. 9 Article 15. Governing Law The validity, construction, performance and enforceability of this Agreement shall be governed in all respects by the laws of Japan. Article 16. Arbitration The parties hereto shall use their best efforts to resolve by mutual agreement any disputes, controversies or differences which may arise from, under, out of or in connection with this Agreement. If any such disputes, controversies or differences cannot be settled between the parties hereto, they shall be finally settled by arbitration in Tokyo, Japan under the Rules of The Japan Commercial Arbitration Association and by three (3) arbitrators appointed in accordance with the Rules. The award rendered by the arbitrators shall be final and binding upon the parties hereto and may be entered in any court of competent jurisdiction in any country. The arbitration shall be conducted in Japanese, with English translation used at the request of either party. Article 17. Notice All notices, requests demands and other communications which shall or may be given under this Agreement shall be made in writing by airmail or by facsimile to the address specified below or to such changed address as may have been previously specified in writing by the addressed party: To: FUJITSU LIMITED 50, Fuchigami Akiruno 197-0833, Japan Attn: Tsuyoshi, Aoki, Director Business Promotion Department LSI Packaging Division Electronic Devices Group Facsimile: (Japan) 42-532-2884 To: ChipPAC, Inc. 47400 Kato Road, Fremont, CA 94538, USA Attn: Satya Chillara Director of Marketing and Business Development Facsimile: (USA) 510-979-8001 Unless otherwise proven, each such notice given by either party hereto shall be deemed to have been received by the other party on the tenth (5th) business day following the mailing date or on the second (2nd) business day following the facsimile date. Article 18. Severability If any term, clause or provision of this Agreement is judged to be ineffective, unenforceable or illegal by a court or executive body with judicial powers having jurisdiction over this Agreement or either party hereto, such ineffective, unenforceable or illegal term, clause or provision shall be deemed deleted from this Agreement, and the validity of any other term, clause or provision of this Agreement shall not be affected; provided that both parties shall negotiate in good faith and agree to a mutually satisfactory term, clause or provision which shall replace the ineffective, unenforceable or illegal term, clause or provision. 10 Article 19. Waiver Any failure of either party to enforce, at any time or for any period of time, any of the provisions of this Agreement shall not be construed as waiver of such provisions or of the right of such party thereafter to enforce such provisions. Article 20. Headings The headings of Articles used in this Agreement are inserted for convenience of the reference only, and shall not be deemed to be a part of his Agreement or to affect the meaning or interpretation of this Agreement. Article 21. Language This Agreement and Exhibits hereto are in English language, which language shall be controlling in all respects. Article 22. Relationship of Parties Neither party shall have, or shall represent that it has, any power, right or authority to bind the other party on behalf of the other party or in the other party's name, or to assume or create any obligation or responsibility, express or implied, on behalf of the other party or in the other party's name. Nothing in this Agreement should be construed to create a partnership, joint venture, or employer-employee relationship, either expressed or implied. Article 23. Entire Agreement; Amendment This Agreement constitute the complete understanding and agreement of the parties and supersedes all prior and contemporaneous negotiations, understandings and agreements with respect to the subject matter of this Agreement. Any modification and amendment of any provision of this Agreement will be effective only if in writing and signed by an authorized representative of both parties. 11 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers or representatives on the day and year first above written. ChipPack, Inc FUJITSU LIMITED By: /s/ Patricia H. McCall By: /s/ Kazuo Abe -------------------------------- --------------------------------------- Typed Name: Patricia H. McCall Typed Name: Kazuo Abe ------------------------ ------------------------------- Title: General Counsel Title: General Manager, LSI Packaging Div. ----------------------------- ------------------------------------ Date: August 21, 2001 Date: August 27, 2001 ------------------------------ ------------------------------------- 12 EXHIBIT A BCC TECHNOLOGY -------------- (CONFIDENTIAL INFORMATION) [redacted*] _____________________ * Confidential treatment requested. 13 EXHIBIT B FUJITSU DELIVERABLES -------------------- 1. Assembly Specifications 2. Inspection Specifications 3. Package Drawings 4. Drawings of Jigs and Tools 5. List of Assembles Equipments 6. List of Parts and Materials 7. Instructions Manuals 14 EXHIBIT C BCC TECHNOLOGY TRAINING ----------------------- 1. Place: Facility of FUJITSU or it's Affiliate which facility will be designated by FUJITSU. 2. Term: Train three (3) engineers in Article 3.2 for 2 weeks (10 working days) within six (6) months after EFFECTIVE DATE. Time schedule will be discussed and determined separately. 3. TRAINING Items (1) Die Bonding (2) Wire Bonding (3) Encapsulating (4) Lead Frame Etching and Alignment Testing is not included in the TRAINING Items. Details of the items will be discussed and determined separately. 4. FUJITSU training staff will speak English throughout the course of the training. 5. All the documents to be used or furnished in the course of the training, if any, are written in English. 6. LICENSEE trainees shall observe all rules and regulations of the facility, including working and safety regulations. LICENSEE agrees to hold FUJITSU and it's Affiliates harmless from any responsibility or liability for sickness of, injuries to or death of such trainees. 7. Unless otherwise expressly provided in this Agreement, LICENSEE trainees shall not access or review internal materials or facilities of FUJITSU or its Affiliates without specific consent of FUJITSU. 15 EX-10.51 9 dex1051.txt BCC LICENSE AGREEMENT ADMINISTRATIVE AMENDMENT EXHIBIT 10.51 Bump Chip Carrier (called "BCC" in this Agreement) License Agreement Administrative Amendment ------------------------ This administrative amendment made and entered into as of the 5th day of March, 2002, by and between: FUJITSU LIMITED, a Japanese corporation, having its principal place of business at 50, Fuchigami Akiruno, Tokyo 197-0833, Japan (hereinafter called "FUJITSU"), and ChipPAC, Inc, a corporation, having its principal place of business at 47400 Kato Road, Fremont, CA 94538, USA ("CHIPPAC"), and ChipPAC Limited, a corporation, having its principal place of business at Craigmuir Chambers, Road Town, Tortola, British Virgin Islands ("LICENSEE"). WITNESS THAT: WHEREAS, CHIPPAC provides sales and administrative services for LICENSEE, and desires to correct an administrative error in it's execution on behalf of LICENSEE of the Bump Chip Carrier License Agreement dated the 27th day of August, 2001 ("THE AGREEMENT") with FUJITSU; WHEREAS, LICENSEE intends to be bound by all articles, provisions, rights and obligations of THE AGREEMENT; and WHEREAS, FUJITSU is willing to allow this correction and is willing to grant to LICENSEE a license to assemble and sell such semiconductor devices under certain patents and technical information of FUJITSU, subject to the terms and conditions set forth herein and in THE AGREEMENT; NOW THEREFORE, in consideration of the above premises and mutual covenants contained herein, both parties hereto agree as follows: 1. Amendments. a) All parties agree to correct the administrative error in the BCC LICENSE AGREEMENT dated August 27th, 2001, and acknowledge that LICENSEE should replace CHIPPAC as the LICENSEE of THE AGREEMENT. b) Article 5.1 is hereby amended and restated in its entirely to read as follows. Payments hereunder shall be made without deductions of taxes, assessments, or other charges of any kind of which may be imposed on FUJITSU by the Government of the British Virgin Islands or other any political subdivision thereof with respect to any amounts due to FUJITSU pursuant to this Agreement, and such taxes, assessments or other charges shall be paid by LICENSEE. However, income taxes or taxes of similar nature imposed on FUJITSU on account of the payment hereunder by the Government of the British Virgin Islands or any political subdivision thereof and paid by LICENSEE for the account of FUJITSU shall be deductible from the royalty payment due to FUJITSU to the extent that such taxes are allowable as a credit against taxes imposed on FUJITSU by the Government of Japan. c) Article 17 is hereby amended and restated in its entirely to read as follows. All notices, requests demands and other communications which shall or may be given under this Agreement shall be made in writing by airmail or facsimile to the address specified below or to such changed address as may have been previously specified in writing by the addressed party: To: FUJITSU LIMITED 50, Fuchigami Akiruno 197-0833, Japan Attn: Tsuyoshi Aoki, Director Business Promotion Department LSI Packaging Division Electronic Devices Group Facsimile: (Japan) 42-532-2884 To: ChipPAC, Inc. 47400 Kato Road, Fremont, CA 94538, USA Attn: Robert Krakauer Chief Financial Officer Facsimile: (USA) 510-979-8001 Unless otherwise proven, each such notice given by either party hereto shall be deemed to have been received by the other party on the fifth (5/th/) business day following the mailing date or on the second (2/nd/) business day following the facsimile date. 2. Others. (Responsibility for CHIPPAC) CHIPPAC hereby agrees to indemnify FUJITSU for any fines or penalties that may accrue or be paid as a result of this administrative error in accordance with the request by FUJITSU. Except as expressly stated above, this Agreement does not otherwise amend THE AGREEMENT, and THE AGREEMENT shall remain in full force and effect as amended hereby. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers or representatives on the day and year first above written. ChipPAC, Inc. By: /s/ Patricia H. McCall ----------------------------------------- Typed Name: Patricia H. McCall -------------------------------- Title: SVP Administration & General Counsel -------------------------------------- Date: 2/28/02 --------------------------------------- ChipPAC Limited By: /s/ Patricia H. McCall ----------------------------------------- Typed Name: Patricia H. McCall -------------------------------- Title: Director -------------------------------------- Date: 2/28/02 --------------------------------------- Fujitsu Limited By: /s/ Tsuyoshi Aoki ----------------------------------------- Typed Name: Tsuyoshi Aoki --------------------------------- Title: Director -------------------------------------- Date: 3/5/02 --------------------------------------- EX-10.52 10 dex1052.txt LICENSE AGREEMENT DATED 09/18/99 EXHIBIT 10.52 LICENSE AGREEMENT This License Agreement ("Agreement") effective as of September 8, 1999 ("Effective Date"), is made by and between LSI Logic Corporation, a Delaware corporation ("LSI"), and ChipPac Limited, a British Virgin Islands corporation ("ChipPac") (each of whom is individually sometimes referred to as a "Party" and both of whom are collectively sometimes referred to as "Parties"). RECITALS This Agreement is made with reference to the following facts and circumstances: A. Whereas LSI wishes to license to ChipPac certain Packaging Technology (as defined below) pertaining to Flip Chips (as defined below), and ChipPac wishes to obtain such a license, according to the terms and conditions set forth herein. B. Whereas LSI wishes to obtain certain packaging services from ChipPAC or ChipPAC Affiliates, and ChipPAC wishes to cause its Affiliates to provide such services, according to the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and the terms, covenants and conditions contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows: 1. DEFINITIONS AND RULES OF CONSTRUCTION DEFINITIONS. In addition to the terms defined elsewhere in this Agreement, the following words and expressions shall have the meanings set forth below: Section 1.1 "Affiliate" of a Party means, any corporation, limited liability company, partnership or other business enterprise: (a) which owns or controls, directly or indirectly, fifty percent (50%) or more of the voting rights with respect to the election of directors or managers, or which has practical control directly or indirectly, of any Party to this Agreement; (b) of which fifty percent (50%) or more of the voting rights with respect to the election of directors or managers is owned or controlled, directly or indirectly, by, or which is under the practical control directly or indirectly of, any Party to this Agreement; or (c) of which fifty percent (50%) or more of the total voting rights with respect to the election of directors or managers is owned or controlled, directly or indirectly, by, or which is under the practical control directly or indirectly of, any corporation, limited liability company, partnership or other business enterprise qualifying under subsections (a) or (b) above. 1 Any corporation, limited liability company, partnership or other business enterprise which would at any time an Affiliate of LSI or ChipPac by reason of the foregoing, shall be considered an Affiliate for purposes of this Agreement only for so long as the foregoing conditions are met. Section 1.2 "ChipPac Improvements" means any Improvements associated with licensed Product Flip Chip (defined in Section 1.6) which are invented, developed, discovered or otherwise acquired by ChipPac during the term of the Agreement. Section 1.3 "Applicable Improvements" means any Improvements which are invented, developed, discovered or otherwise acquired by LSI before January 1, 2004. Section 1.4 "Claim" is defined in Section 9.1. Section 1.5 "Confidential Information" means (i) the Technical Information and (ii) information disclosed by either party, if disclosed in writing, that is identified and marked as confidential (or with words of similar import) at the time of its disclosure or which, if disclosed verbally, is designated confidential at the time of disclosure and is summarized and identified as confidential in a writing delivered to the receiving party on or before thirty (30) days after the disclosure; provided that Confidential Information shall in no event include any information that: (a) was known to the receiving party prior to its receipt hereunder; (b) is or becomes publicly available without breach of this Agreement; (c) is received from another without obligation of confidentiality to the disclosing party and without breach of this Agreement; or (d) is disclosed by the disclosing party to anther without an obligation of confidentiality. Section 1.6 "Flip Chip" means a semiconductor device assembly characterized by having all of the following elements: (i) an organic substrate with a top surface and a bottom surface; (ii) a semiconductor die with an active surface and an opposing top surface; (iii) solder bumps formed on the active surface of the semiconductor die and mounted to the top surface of the organic substrate; (iv) underfill epoxy disposed between the solder bumps and the organic substrate; (v) solder balls (output leads) formed on the bottom surface of the organic substrate; (vi) a stiffener disposed around the periphery of the top surface of the substrate, the stiffener not being in contact with the semiconductor die; and (vii) a head spreader with a top surface and a bottom surface, the bottom surface lying substantially parallel to the top surface of the substrate, the bottom surface resting upon the stiffener (either directly or through an epoxy or the like), the bottom surface in thermal contact with the top surface of the semiconductor die (either by being in direct contact or being in contact through grease or the like). Section 1.7 "Improvements" means all developments, enhancements, modifications or betterments that may be made in the Packaging Technology or Technical Information, or that is otherwise useful with respect to the manufacture or design of a CSP, whether or not patented, patentable, copyrighted or copyrightable. Section 1.8 "Initial Qualification" means completing LSI's subcontractor qualification requirements for a Flip Chip. Section 1.9 "Intellectual Property Rights" means (a) all Patent Rights; (b) all copyrights and all other literary property and author rights, and all rights, title and interest in and to all 2 copyrights, copyright registrations certificates of copyrights and copyrighted interests; and (c) all rights, title and interest in and to all trade secrets and trade secret rights. Section 1.10 "Licensed Product" means a Flip Chip with at least 200 solder balls (output leads for coupling to a printed circuit board). Section 1.11 "LSI's Intellectual Property Rights" means all Intellectual Property Rights owned by LSI or licensed to LSI with the right to grant sublicenses thereunder without payment of royalties, in and to the Packaging Technology and/or the Technical Information. Section 1.12 "Packaging Technology" means LSI's technology for use in packaging integrated circuits as described in the Technical Information. Section 1.13 "Patent Rights" means any patent rights, letters patent and applications for letters patent, or other government-issued or granted indicia of invention ownership, including any reissue, division, term extension, continuation or continuation-in-part. Section 1.14 "Technical Information" means the materials described in Exhibit A. 2. LICENSE AND TECHNOLOGY TRANSFER Section 2.1 LICENSE GRANT. Subject to the terms and conditions of this Agreement, LSI agrees to grant and does hereby grant to ChipPac, a personal, non-exclusive, non-transferable right and license (with the right to grant sublicenses to the Manufacturing Companies as specified in Section 2.4) under LSI's Intellectual Property Rights to use the Packaging Technology and the Technical Information and Applicable Improvements for the purposes of manufacturing, using, selling and importing CSPs worldwide. The foregoing license, subject to the applicable terms and conditions of this Agreement, including without limitation Sections 2.3, 2.4, 2.5, 2.7 and Section 13, shall become perpetual, irrevocable and fully paid up upon any termination of this Agreement by LSI if, prior to the date of termination, ChipPAC has paid LSI [redacted*] according to Section 5.3. The foregoing license, subject to the applicable terms and conditions of this Agreement, including without limitation Sections 2.3, 2.4, 2.5, 2.7 and Section 13, shall become perpetual, irrevocable and fully paid up upon: (i) payment by CHIPPAC of all fees due under Section 5 (including [redacted*] pursuant to Section 5.2), or January 1, 2004, whichever is earlier (provided that as of January 1, 2004, CHIPPAC is not in breach of this Agreement); or (ii) any termination of this Agreement by LSI prior to January 1, 2004, so long as CHIPPAC has paid LSI [redacted*] according to Section 5.3. Section 2.2 EXCLUSIVITY. The license set forth in Section 2.1 shall be non-exclusive except as otherwise explicitly provided in this Section 2.2. (a) Provided that CHIPPAC uses reasonable diligence to implement the Packaging Technology, LSI shall not grant any third party in addition to those licensed as of the Effective Date the right to use before May 1, 2000 any material portion of the Packaging Technology for the purpose of manufacturing Flip Chips. However, LSI will have the right at any time to provide the Package Technology to any third party for the purposes of technology transfer and qualification. _______________________ * Confidential treatment requested. 3 Section 2.3 NO SUBLICENSES; NO RIGHTS IN TRADEMARKS; NO IMPLIED LICENSES. The license granted pursuant to Section 2.1 shall not be sublicensed by ChipPac, other than to Manufacturing Companies as specified in Section 2.4, and will convey no right to ChipPac to use or register any trademarks, service marks, or trade names of LSI or of its Affiliates. Nothing herein shall be construed as committing LSI to convey to ChipPac either expressly or by implication, any right under any letters patent or other Intellectual Property Rights of LSI, or any right to use any Technical Information, except as explicitly set forth in Section 2.1 Section 2.4 HAVE MADE RIGHTS EXCLUDED. "Have-made" rights are not included in the license granted under Section 2.1. Accordingly, ChipPac shall not have the right to have Licensed Products made for it by a third party (including, without limitation, any Affiliate of CHIPPAC) at a third party's manufacturing facility or elsewhere without the prior written approval of LSI, which approval LSI may not unreasonably withhold. Notwithstanding the foregoing, this provision shall not preclude ChipPac Korea, Limited, ChipPAC Shanghai, Limited and ChipPac U.S.A. (the "Manufacturing Companies") from making the Licensed Products for CHIPPAC provided that before CHIPPAC provides the Manufacturing Companies with any Packaging Technology, the Manufacturing Companies agree in writing to terms and conditions no less protective of LSI than those set forth herein, including, without limitations, Sections 2.1, 2.3, 2.4, 2.5, 2.7, 3, 6, 7, 8, 9.1, 9.2, 9.3 and 9.4. CHIPPAC shall be fully liable to LSI for any breach by the Manufacturing Companies of such terms and conditions. Section 2.5 MARKING. ChipPac shall comply with all pertinent patent marking statutes with respect to any patents that are part of LSI's Intellectual Property, provided that LSI provides adequate information to ChipPac to enable ChipPac to comply with such statutes. Section 2.6 TECHNOLOGY TRANSFER. Within 30 days of the Effective Date, LSI will begin to provide CHIPPAC with a copy of the Technical Information ("Technology Transfer"). LSI will provide CHIPPAC with the services of up to 3 engineers for up to a total of 3 months per engineer to assist CHIPPAC with implementing the Packaging Technology at CHIPPAC's facilities, ChipPac Korea, Limited and/or ChipPac Shanghai, Limited. Notwithstanding the foregoing, in no event shall LSI be required to incur fully burdened costs (including employee time, lodging, and other associated travel costs) associated with such Technology Transfer in excess of [redacted*]. The parties will use commercially reasonable efforts to complete the Technology Transfer by July 31, 2000. In addition to the services described above, LSI will provide a reasonable amount of support with respect to CHIPPAC's use of the Packaging Technology at CHIPPAC's United States and offshore facilities before Initial Qualification. Such support shall include telephone support but in no event shall LSI be required to provide its personnel at CHIPPAC's facilities in connection with such support. Section 2.7 OWNERSHIP. As between the Parties, LSI shall retain ownership of the Packaging Technology, Technical Information, and all of LSI's Intellectual Property Rights. Section 2.8 ADVERTISING AND SALE LIMITATIONS. CHIPPAC shall not (i) publicly advertise before October 1, 1999 or disclose to potential customers before October 1, 1999 that it has a license to the Packaging Technology, and (ii) CHIPPAC shall not accept orders before October 1, 1999 for prototype or production Flip Chips made with the Packaging Technology. _______________________ * Confidential treatment requested. 4 3. IMPROVEMENTS ChipPac hereby grants LSI a non-exclusive, fully paid-up, royalty-free, perpetual, irrevocable, worldwide license under all pertinent Intellectual Property Rights in and to ChipPac Improvements to make, have made, use and sell packaging for semiconductor products, with the right to grant sublicenses therefore to any one or more of LSI's Affiliates and to persons that do not compete with ChipPac or its Affiliates. Upon LSI's request, ChipPac will provide LSI with all pertinent know-how regarding any "ChipPac Improvements." 4. PACKAGING SERVICES Section 4.1 PURCHASE COMMITMENT. Subject to the terms and conditions of this Agreement, LSI agrees that it will purchase from CHIPPAC packaging services for [redacted*] of the Flip Chips required by LSI to be delivered to LSI's customers during the [redacted*] ("Purchase Commitment"). The Purchase Commitment is conditioned on: (i) CHIPPAC at all times remaining competitive with respect to price, quality and turn around time; and (ii) the Parties reaching mutual agreement with respect to terms and conditions that will govern the purchase of Flip Chip packaging services (collectively, the "Commitment Conditions"). In the event that CHIPPAC is unable to meet all of the Commitment Conditions with respect to any part of the Purchase Commitment, LSI will have the right to use a third party (or itself) for such part of the Purchase Commitment. Section 4.2 SUPPLY COMMITMENT. Subject to the terms and conditions of this Agreement, CHIPPAC agrees to satisfy the Purchase Commitment (as defined in Section 4.1) ("Supply Commitment") provided that LSI supplies CHIPPAC each calendar quarter with a non-binding forecast that is a good faith estimate of LSI's total monthly Flip Chip requirements for the then remaining portion of the [redacted*]. 5. FEES; REPORTS AND PAYMENT CHIPPAC's fees under this Agreement, which shall in no case exceed [redacted*] in the aggregate, shall be payable to LSI as follows: Section 5.1 PAYMENTS FOR TECHNOLOGY TRANSFER SERVICES. CHIPPAC shall pay LSI [redacted*] by October 30, 1999 and [redacted*] by January 30, 2000 in return for the services to be provided by LSI pursuant to Section 2.6. Section 5.2 FEES. In consideration of the right and license to use the Packaging Technology and Applicable Improvements and the associated Technical Information granted in Section 2.1, CHIPPAC shall pay to LSI: (a) U.S. [redacted*] within the thirty (30) day period beginning with the date that process certification is completed and that assembly of qualification materials begins. Process certification is defined as the implementation of materials and process recipes into the CHIPPAC equipment set and demonstration of product conformance to physical parameters as specified in LSI's Flip Chip corporate specifications covering buildup, microlam and 4 layer Packaging Technologies. _____________________ *Confidential treatment requested. 5 (b) U.S. [redacted*] within the thirty (30) day period beginning with the date that Initial Qualification occurs, including U.S. [redacted*] for qualification of build-up packaging for Packaging Technology, U.S. [redacted*] for qualification of microlam technology for Packaging Technology, and U.S. [redacted*] for qualification of 4 layer technology for Packaging Technology. (c) for the first eight customer products (which may be from the same customer), U.S. [redacted*] the thirty (30) day period beginning with the date that the customer first qualifies CHIPPAC to produce Flip Chip packaging for a particular product, which qualification shall be deemed to have occurred no later than the first day such customer places an order with CHIPPAC to provide Flip Chip packaging for such product, or [redacted*] by June 30, 2000, whichever comes first. Section 5.3 LICENSE FEES. In consideration of the right and license to use the Packaging Technology and Applicable Improvements and the associated Technical Information granted in Section 2.1, CHIPPAC shall pay to LSI for Licensed Products manufactured and used by CHIPPAC or the Manufacturing Companies (as defined in Section 2.4) or provided by CHIPPAC or the Manufacturing Companies (as defined in Section 2.4) to any third party a deferred license fee in the amount of U.S. [redacted*] per solder ball (output lead for coupling to a printed circuit board) on each such Licensed Product (excluding Licensed Products produced by CHIPPAC for LSI). In no event shall license fees due pursuant to this Section exceed U.S. [redacted*] ("License Cap"). Further, no license fees will be due for Licensed Products manufactured by CHIPPAC on and after January 1, 2004. Section 5.4 REPORTS; PAYMENTS. On or before the thirtieth (30th) day of each January, April, July and October, and on or before the thirtieth (30th) day of the month next following the month which includes the effective date of the early termination of this Agreement (a "Payment Date"), CHIPPAC shall deliver to LSI a written report in the English language, in form satisfactory to LSI, showing (a) the unit quantity and number of solder balls (output leads for coupling to a printed circuit board) of the various types of Licensed Products manufactured, used or sold by CHIPPAC during the preceding calendar quarter or portion thereof; and (b) the calculation of license fees due thereon (such report being referred to hereinafter as a "Statement of Account"). Said Statement of Account shall be accompanied by LSI's wire transfer of immediately available funds in payment of the license fees due. All calculations and payments of license fees shall be in U.S. dollars. Section 5.5 INTEREST ON LATE PAYMENTS. Any license fee payment not received by LSI in immediately available funds by the fifth (5th) day following any Payment Date (as defined in Section 5.4) shall bear interest from the applicable Payment Date until paid in full by CHIPPAC to LSI at the annual rate equal to prime + 3/4%; provided, however, that in no event shall such interest rate exceed the highest rate permissible under applicable law. Section 5.6 TAXES. All taxes imposed as a result of any payments made pursuant to this Section 5.6 shall be paid by the Party required to do so by applicable law; provided, however, that if so required by applicable law and any relevant tax treaty, ChipPac shall (a) withhold the amount of any national or federal income taxes levied by the government in question, on the payments to be made pursuant to this Section 5.6, and (b) promptly effect ___________________ * Confidential treatment requested. 6 payment thereof to the appropriate taxing authorities; and (c) transmit to LSI officials tax receipts or other evidence issued by said appropriate taxing authorities sufficient to enable LSI to support a claim for the appropriate income tax credit in respect of any such taxes so withheld and paid to the governments in question. 6. RECORDS; INSPECTIONS AND AUDITS Section 6.1 RECORDS. CHIPPAC shall keep complete and accurate records and books of account in accordance with United States generally accepted accounting principles, consistently applied, containing all information and data required for the computation and verification of the amounts to be paid to LSI hereunder. CHIPPAC shall retain such records and books for a period of two (2) years following termination of this Agreement; provided that if any litigation, arbitration, judicial reference or other legal proceeding is commenced during any such retention period CHIPPAC shall retain such records and books until the conclusion of such litigation, arbitration, judicial reference or other legal proceeding. Section 6.2 INSPECTIONS AND AUDITS. No more than once per year, LSI shall have the right, through an accounting firm selected by LSI, which shall be a public accounting firm nationally recognized in the United States (the "Accountants"), to inspect, audit, or copy during ordinary working hours the records and books referred to in Section 6.1 and to interview the employees, agents and accountants of CHIPPAC responsible for the preparation and maintenance of such records and books, for the purpose of determining whether a payment pursuant to Section 5.2 is due and/or verifying the accuracy of (i) such records and books, and (ii) any license fee payment made under this Agreement. Such Accountants shall agree to standard confidentiality provisions. Such inspections or audits shall be conducted at LSI's expense; provided, however, if an inspection or audit discloses material variations resulting in underpayment of license fees by CHIPPAC of greater than 7.5% of the amounts due under Section 5 during the one year period preceding the audit date, as reasonably determined by such Accountants in good faith, CHIPPAC shall be obligated to reimburse LSI for all costs and expenses of the inspection or audit (and interest on the underpayment). Notwithstanding anything to the contrary above, LSI's right to inspect of audit CHIPPAC's records and reports shall expire two (2) years after termination of this Agreement by lapse of time or otherwise; provided that if any litigation, arbitration, judicial reference or other legal proceeding is commenced during such two year period, LSI's audit and inspection rights shall remain in effect until the conclusion of such litigation, arbitration, judicial reference or other legal proceeding. 7. WARRANTIES AND REPRESENTATIONS Section 7.1 GENERAL WARRANTIES AND REPRESENTATIONS. Each Party warrants and represents to, and covenants with, the other Party that all corporate action necessary for the authorization, execution and delivery of this Agreement by such Party and the performance of its obligations hereunder has been taken. Section 7.2 DISCLAIMER. EXCEPT AS OTHERWISE PROVIDED IN SECTION 7.3, LSI DISCLAIMS ANY AND ALL EXPRESS WARRANTIES, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NONINFRINGEMENT, PERTAINING TO THE 7 PACKAGING TECHNOLOGY, TECHNICAL INFORMATION, OR ANY OTHER TECHNOLOGY PROVIDED BY LSI HEREUNDER. Without limiting the foregoing, nothing in this Agreement shall be deemed to be a warranty or representation, either express or implied, that: (i) LSI or its Affiliates will continue to develop the Packaging Technology; and (ii) that LSI will enforce LSI's Intellectual Property Rights against any third party; or (iii) except as provided in Section 7.3, the exercise of CHIPPAC's rights hereunder will not infringe any intellectual property rights (including, without limitation, patent rights). LSI shall have no liability whatsoever to ChipPac in the event that ChipPac is unable to successfully implement the Packaging Technology. Section 7.3 LIMITED INTELLECTUAL PROPERTY WARRANTIES. LSI warrants and represents to ChipPac that as of the Effective Date for the Packaging Technology, (i) the Packaging Technology and the associated Technical Information do not impermissibly include any trade secrets or copyrighted material of any third party; and (ii) no third party has notified LSI that the Packaging Technology infringes its patents. To the extent LSI owns a patent that is part of LSI's Intellectual Property Rights, LSI has the right to license such patent pursuant to this Agreement. ChipPac warrants and represents to LSI that any and all ChipPac Improvements provided by ChipPac to LSI will not impermissibly include any trade secrets or copyrighted material of any third party. 8. LIMITATION ON DAMAGES NEITHER PARTY SHALL BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL LOSS OR DAMAGE (INCLUDING, WITHOUT LIMITATION, LOSS OF PROFITS AND LOSS OF USE) SUFFERED BY THE OTHER PARTY ARISING FROM OR RELATING TO THE PERFORMANCE, NON-PERFORMANCE, BREACH OF OR DEFAULT UNDER A COVENANT, WARRANTY, REPRESENTATION, TERM OR CONDITION OF THIS AGREEMENT, PROVIDED THAT THE FOREGOING SHALL NOT APPLY TO ANY BREACH BY CHIPPAC OF THE LICENSE GRANTED HEREIN OR THE IMPROPER USE OR DISCLOSURE BY CHIPPAC OR ITS AFFILIATES OF THE PACKAGING TECHNOLOGY TECHNICAL INFORMATION, AND/OR APPLICABLE IMPROVEMENTS. LSI'S AGGREGATE LIABILITY ARISING FROM OR RELATING TO LSI'S PERFORMANCE, NON-PERFORMANCE, BREACH OF OR DEFAULT UNDER A COVENANT, WARRANTY, REPRESENTATION, TERM OR CONDITION OF THIS AGREEMENT, SHALL NOT EXCEED THE PAYMENTS IT HAS RECEIVED FROM CHIPPAC HEREUNDER. EXCEPT AS EXPLICITLY SET FORTH ABOVE, THE LIMITATIONS ON LIABILITY AND DAMAGES SET FORTH ABOVE APPLY TO ALL CAUSES OF ACTION THAT MAY BE ASSERTED HEREUNDER, WHETHER SOUNDING IN BREACH OF CONTRACT, BREACH OF WARRANTY, TORT, PRODUCT LIABILITY, NEGLIGENCE OR OTHERWISE. IN NO EVENT SHALL LSI BE LIABLE FOR THE COST OF PROCUREMENT OF SUBSTITUTE TECHNOLOGY. 9. THIRD PARTY CLAIMS Section 9.1 INTELLECTUAL PROPERTY RIGHTS. ---------------------------- 8 (a) Subject to the limitations set forth in Section 8 and in this Section 9.1, each Party ("Defending Party") shall defend and settle any claim, demand, cause of action, loss, damage, liability, fine, penalty, cost or expense (each, a "Claim") brought against the other Party ("Defended Party") arising our of a breach of the Defending Party's warranties and representations set forth in Section .3 and pay all damages to the extent attributable to such breach that are awarded pursuant to such Claims. As a condition of the Defending Party's obligations set forth in the preceding sentence, the Defended Party shall give the Defending Party prompt written notice of any such Claims as described in the first sentence of this Section, full authority to defend and settle such Claims and all reasonable assistance to the Defending Party (at the Defending Party's expense) as may be requested by Defending Party. (b) If, as a result of a Claim for which LSI is the Defending Party, ChipPac becomes enjoined from using the Packaging Technology or if LSI reasonably believes such a Claim may be initiated: (a) LSI shall at its election (i) procure for ChipPac the right to use the Packaging Technology; (ii) provide ChipPac with replacement technology (which shall become Packaging Technology) that is non-infringing that is a reasonable substitute for the infringing Packaging Technology; or (iii) if neither (i) nor (ii) is commercially feasible, refund all payments made under Section 5. In cases (ii) and (iii) above, ChipPAC will immediately cease using the Packaging Technology in question upon receiving written notice from LSI. In the case where ChipPAC is the Defending party, the Defended Party shall include LSI's Affiliates and any third party whom LSI has provided the ChipPAC Improvement in question pursuant to Section 3. Section 9.2 EXCLUSIONS. LSI shall have no obligation except as set forth above in this Section 9 arising out of or relating to the continued use of any infringing technology after LSI has provided ChipPac with written notice pursuant to Section 7.1 to cease such use. Section 9.3 NOTICE. Each Party ("Notifying Party") shall provided the other Party ("Notified Party") with written notice promptly after learning of any allegations that the Notifying Party's use or exploitation of any technology provided by the Notified Party hereunder infringes or misappropriates any third party's Intellectual Property Rights. To the extent that any Claims arising our of such allegations do not arise out of the Notified Party's warranties pursuant to Section 7.3, the Notified Party shall have the right, but not the obligation, to assist in the defense of any such Claims. If LSI is the Notified Party, LSI will (i) provide ChipPac with all pertinent information regarding LSI's creation of the Packaging Technology and (iii) make the pertinent LSI employees available to ChipPac to assist ChipPac (and its attorneys) with interpreting and verifying such information. Section 9.4 HIGH RISK ACTIVITIES: INDEMNITY. The Packaging Technology is not intended to create packaging for products that will be used in medical or aviation activities or in other high risk activities. 10. ENFORCEMENT ChipPac shall not have the right to enforce any of LSI's Intellectual Property Rights. In the event that ChipPac learns that any third party is infringing or misappropriating any of LSI's Intellectual Property Rights, ChipPac shall promptly thereafter provide LSI with written notice regarding such infringement or misappropriation. 9 11. TERM; DEFAULT AND TERMINATION;EFFECT OF TERMINATION Section 11.1 TERM. Unless sooner terminated pursuant to the early termination provisions hereof, this Agreement apart from Section 4, shall be effective upon the Effective Date and shall continue in effect. Unless sooner terminated pursuant to the early termination provision hereof, Section 4 shall expire three years from the Initial Qualification. Section 11.2 TERMINATION FOR DEFAULT. If either Party defaults on a material provision and does not cure such default within forty-five (45) days after written notice thereof is received from the other Party, such other Party shall have the right at its option to terminate the Agreement. Section 11.3 OTHER TERMINATION. ChipPAC shall have the right to terminate this Agreement without cause upon six months prior written notice to LSI. If ChipPAC terminates this Agreement pursuant to this Section 11.3, it shall pay LSI [redacted*] less any amounts paid by ChipPAC hereunder prior to the date of such termination. Section 11.4 INSOLVENCY. Should either Party: (a) become insolvent; (b) make an assignment for the benefit of creditors; (c) file or have filed against it a petition in bankruptcy or seeking reorganization; (d) have a receiver appointed; or (e) institute any proceedings for liquidation or winding up; then the other Party may, in addition to other rights and remedies it may have, terminate the Agreement or any purchase orders placed under the Agreement immediately by written notice. Section 11.5 BREACH OF CONFIDENTIALITY. The Parties stipulate that the arbitration provisions of Section 14.11 shall not apply to any temporary restraining order, injunctive relief, protective order or other provisional remedy sought to prohibit a breach or threatened breach of the provisions of Section 13.1. Section 11.6 RIGHTS AND REMEDIES; TERMINATION OF CERTAIN PROVISIONS. The termination of this Agreement shall be without prejudice to (a) the right of LSI to receive upon its request all payments accrued and unpaid hereunder; (b) the rights and remedies of any Party with respect to the current or any previous breach of any other representations, warranties, covenants, terms, conditions or provisions of this Agreement (provided that the limitation on liability set forth in Article 6 shall apply to such rights and remedies); (c) any rights to indemnification set forth herein; (d) the grant-back license from ChipPAC to LSI in ChipPAC's Improvements under Section 3; (e) ChipPAC's license under Section 2 if the license set forth in Section 2.1 has become irrevocable according to the terms specified therein; and (f) any other provisions hereof which expressly or necessarily call for performance after the termination of this Agreement. To the extent this Agreement is terminated for any reason within three years of the Initial Qualification, LSI shall be deemed to have no Purchase Commitment (as defined in Section 4.2). Section 11.7 TERMINATION OF CHIPPAC'S RIGHTS UPON DEFAULT. Immediately upon and after termination (by either Party) of this Agreement, (i) applicable license fees shall become due and payable with respect to sales of all Licensed Products that were manufactured by ChipPAC or which were in the course of such manufacture prior to such termination; (ii) unless the license set forth in Section 2.1 has become irrevocable according to the terms specified therein, ___________________ * Confidential treatment requested. 10 ChipPAC shall (a) cease making, marketing, using and selling of Licensed Products, (b) cease its use of any and all Packaging Technology and Technical Information; and (c) return to LSI all media containing Technical Information and copies thereof and all other materials and data of ChipPAC which contains or are based on the Packaging Technology; and (iii) any and all restrictions imposed on LSI according to Section 2.2 shall immediately terminate. 12. ADDITIONAL BANKRUPTCY PROVISIONS Section 12.1 GENERALLY. This is a contract under which applicable law excuses LSI from accepting performance from or rendering performance to ChipPac within the meaning of sections 365(c) and 365(e)(2) of the Bankruptcy Code, 11 U.S.C. Secs. 365 (c), 365(e)(2). Accordingly, in the event of ChipPac's bankruptcy, this Agreement cannot be assumed or assigned without LSI's express written consent. Section 12.2 ASSUMPTION. In the event LSI consents to assumption and assignment of this Agreement, any person or entity to which this Agreement is assigned pursuant to the provisions of the Bankruptcy Code, 11 U.S.C. Section 101 et seq., shall be deemed without further act or deed to have assumed all of the obligations arising under this Agreement on and after the date of such assignment. Any such assignee shall upon demand execute and deliver to LSI an instrument confirming such assumption. Section 12.3 LIFTING OF STAY. In the event that ChipPac is the subject of any insolvency, bankruptcy, reorganization, or similar proceeding under the United States Bankruptcy Code, voluntarily or involuntarily, the Parties stipulate that LSI is entitled to the automatic and absolute lifting of the automatic stay as to the enforcement of its remedies under this Agreement, including specifically but not limited to the stay imposed by 11 U.S.C. Section 362, as amended; ChipPac hereby consents to the immediate lifting of any such automatic stay, and will not contest any action by LSI to lift such stay; ChipPac expressly acknowledges that it has no equity in the license and rights granted under this Agreement. 13. CONFIDENTIALITY Section 13.1 OBLIGATION. Each Party agrees to maintain in confidence the other Party's Confidential Information. Neither Party shall disclose the other Party's Confidential Information to any other person or organization without the prior written consent of the other Party. Each Party shall protect such information from disclosure to others with at least the same degree of case as such Party exercises to protect its own information of similar type and importance provided that the degree of care exercised with respect to Confidential Information that is Technical Information shall in no event be less than a high degree of care. Each Party shall disclose the other Party's Confidential Information only to those employees of the receiving Party that have a need to know such information. Neither Party shall use the other Party's Confidential Information except as expressly permitted in this Agreement. The obligations of confidentiality and protection required by this section shall survive the expiration, termination or cancellation of this Agreement for a period of five (5) years, provided that the obligations with respect to Confidential Information that is Technical Information shall survive in perpetuity. 11 Section 13.2 THIRD PARTY REQUEST FOR INFORMATION. Except as otherwise provided in this Agreement, either Party shall immediately notify the other Party of any private or governmental request for secret or confidential information (including, without limitation, Confidential Information) or any other information or documents relating to this Agreement. Each Party shall have the right to participate in any other Party's response to any such request. In the event that a Party receives any subpoena or other legal process requiring the production of information, documents, data, work papers, reports, or other materials relating to any secret or confidential information (including, without limitation, Confidential Information) or to this Agreement, that party shall: (a) give the other Party, if possible, the opportunity to participate in quashing, modifying or otherwise responding to any compulsory process in an appropriate and timely manner; and (b) cooperate fully with the other Party's efforts to narrow the scope of any such compulsory process, to obtain a protective order limiting the use or disclosure of the information sought, or in any other lawful way to obtain continued protection of the secret or confidential information. Section 13.3 NOTICE. If either Party ("First Party") becomes aware of the loss, theft or misappropriation of the other Party's Confidential Information which is in the First Party's possession or control, the First Party shall notify the other Party in writing within five (5) days of its discovery of such loss, theft or misappropriation. Section 13.4 TERMS CONFIDENTIAL; PUBLICITY. Neither Party shall disclose the terms and conditions of this Agreement to any third party without the other Party's prior written consent, except to the extent required by applicable governmental authorities. Notwithstanding the foregoing, each Party shall have the right to disclose this Agreement to its attorneys, accountants and like personnel, and to potential investors or acquirors, and for SEC filings, IPO events under reasonable conditions of confidentiality. ChipPac agrees to issue joint press announcements with LSI promptly after the Effective Date and promptly after Initial Qualification. Each party must approve of the content of such announcements before they are released. Neither party shall otherwise issue a press release regarding this Agreement without the other Party's prior written consent. 14. GENERAL PROVISIONS Section 14.1 ASSIGNMENT. ChipPac shall not assign any of its rights or privileges to any person (including its Affiliates) hereunder, whether by operation of law or otherwise (including, without limitation, by merger with or acquisition by a third party) without the prior written approval of LSI, which approval LSI shall not unreasonably withhold. Any attempted assignment in violation of this Section 14.1 shall be null and void AB INITIO. LSI shall have the unrestricted right to assign this Agreement to any person, in which case the definition of "LSI's Intellectual Property Rights" shall include only those Intellectual Property Rights licensed hereunder prior to the effective date of any such assignment. 12 Section 14.2 CONTROLLING LAW. This Agreement shall be construed and interpreted in accordance with the law of the State of California (except its choice of law rules) as though made by two parties residing in California so as to be fully performed within that State. Section 14.3 EXPORT CONTROLS. ChipPac shall comply with all export control laws and regulations of the United States of America. Section 14.4 WAIVER. No failure or delay on the part of either party in the exercise of any right or privilege hereunder shall operate as a waiver thereof or of the exercise of any right or privilege hereunder, nor shall any single or partial exercise of any such right or privilege preclude other or further exercise thereof or of any other right or privilege. Section 14.5 NOTICE. Any notice or claim provided for herein shall be in writing and shall be given (i) by personal delivery, effective upon delivery, (ii) by first class mail, postage prepaid, addressed to the address first stated above for the recipient, effective one (1) business day after proper deposit in the mail, or (iii) by facsimile directed to the facsimile number first indicated above for the recipient, but only if accompanied by mailing of a copy in accordance with (ii) above, effective as of the date of facsimile transmission. Section 14.6 SEVERABILITY; SEVERAL RIGHTS AND OBLIGATIONS. If any provision of this Agreement is held to be ineffective, unenforceable or illegal for any reason, such decision shall not effect the validity or enforcement of any or all of the remaining portions thereof. If more than one Product is covered under this Agreement, then the rights and obligations of the parties as to each such Product shall be several and independent from those as to any other Product. Section 14.7 OTHER RIGHTS. Nothing contained in this Agreement shall be construed as conferring by implication, estoppel or otherwise upon either party or any third party any license or other right except, solely as to the parties hereto, the rights expressly granted hereunder. Section 14.8 PUBLICITY. All notices to third parties and all other publicity concerning the transactions contemplated by this Agreement shall be jointly planned and coordinated by and between the parties. Neither of the parties shall act unilaterally in this regard without the prior written approval of the other party; however, this approval shall not be unreasonably withheld. Section 14.9 TITLES. Any titles included herein are for convenience only and are not to be used in the interpretation of this Agreement. Section 14.10 INTEGRATION; MODIFICATION. This Agreement, together with the Exhibits hereto, embodies the final, complete and exclusive statement of the terms of their agreement with respect to the subject matter hereof and supersedes any prior or contemporaneous representations, descriptions, courses of dealing or agreements as to such subject matter. No amendment or modification of this Agreement or any Exhibit hereto shall be valid or binding upon the parties unless in writing and signed by an officer of each party, and NO EMPLOYEE OF EITHER PARTY OR REPRESENTATIVE HAS ANY AUTHORITY OTHERWISE TO BIND EITHER PARTY TO ANY OBLIGATION OR LIABILITY NOT EXPRESSLY STATED HEREIN. 13 Section 14.11 ARBITRATION. Any dispute relating to the enforceability, interpretation of performance of this Agreement (other than claims for which injunctive relief is sought), or relating to the parties' relationship or any transactions between them arising out of this Agreement, shall be resolved at the request of either party through binding arbitration in San Francisco, California; provided, however, that it shall not be deemed a waiver of the right to arbitrate for a party to seek, nor shall this Agreement be interpreted to preclude a party from seeking, in a court of competent jurisdiction, temporary or preliminary injunctive relief pending entry of judgment on any arbitration award, or other appropriate prejudgment relief. Any discovery shall be conducted in accordance with the Federal Rules of Civil Procedure. Except as otherwise expressly provided herein, arbitration shall be conducted in accordance with the Commercial Rules of the American Arbitration Association. The arbitration shall be conducted by three arbitrators. Each party will select one arbitrator, and the two arbitrators thus selected will select a third arbitrator. Judgment upon award by the arbitrators may be entered by any state or federal court having jurisdiction. Section 14.12 RELATIONSHIP TO THE PARTIES. The relationship of the parties hereto is that of independent contractors. Neither party, nor its agents or employees shall be deemed to be the agent, employee, joint venturer, partner or fiduciary of the other party. Neither party shall have the right to bind the other party, transact any business in the other party's name or on its behalf or incur any liability for or on behalf of the other party. 14 IN WITNESS HEREOF the parties have caused this Agreement to be signed by their duly authorized representatives. LSI LOGIC CORPORATION ("LSI") By: /s/ Maniam B. Alagaratnam -------------------------------------------- Name: Maniam B. Alagaratnam -------------------------------------------- Title: Vice President, Package Development -------------------------------------------- Date: September 8, 1999 -------------------------------------------- CHIPPAC LIMITED ("ChipPac") By: /s/ Dennis McKenna -------------------------------------------- Name: Dennis McKenna -------------------------------------------- Title: President and CEO -------------------------------------------- Date: September 8, 1999 -------------------------------------------- S-1 EXHIBIT A TECHNICAL INFORMATION FLIP CHIP PACKAGE TECHNOLOGY DELIVERABLES 1. Package Construction a. [redacted*] b. [redacted*] c. [redacted*] 2. Materials Set: a. [redacted*] b. [redacted*] c. [redacted*] d. [redacted*] e. [redacted*] 3. Process Flow: a. [redacted*] b. [redacted*] c. [redacted*] d. [redacted*] 4. Process Recipe's: a. [redacted*] b. [redacted*] c. [redacted*] d. [redacted*] e. [redacted*] 5. Equipment Set: a. [redacted*] b. [redacted*] c. [redacted*] d. [redacted*] 6. Package Optimization Experiments: a. [redacted*] b. [redacted*] c. [redacted*] + [redacted*] + [redacted*] + [redacted*] + [redacted*] + [redacted*] + [redacted*] 7. Package Simulation Reports: a. [redacted*] b. [redacted*] c. [redacted*] d. [redacted*] e. [redacted*] _______________________ * Confidential treatment requested. C-1 f. [redacted*] 8. Qualification Reports: a. [redacted*] b. [redacted*] 9. Flip Chip Package Design Rules a. [redacted*] b. [redacted*] c. [redacted*] 10. Wafer Bump Design Rules: a. [redacted*] b. [redacted*] c. [redacted*] 11. Wafer Bump Supplier Database: a. [redacted*] b. [redacted*] 12. Package Tooling/Design Availability: a. [redacted*] b. [redacted*] 13. Intellectual Property: 14. Implementation Support: a. [redacted*] b. [redacted*] c. [redacted*] d. [redacted*] e. [redacted*] f. [redacted*] g. [redacted*] h. [redacted*] _______________________ * Confidential treatment requested. C-2 EX-10.53 11 dex1053.txt SUBCONTRACT AGREEMENT EXHIBIT 10.53 An Assembly / Final Test Subcontract Agreement Between CHIPPAC LTD. AND AFFILIATES., whose name and address are stated in Section Two of the First Schedule and FAIRCHILD SEMICONDUCTOR CORPORATION AND AFFILIATES whose business registration address is stated in Section Three of the First Schedule 1 THIS AGREEMENT is made the day and year stated in Section One of the First Schedule hereto between: 1. The Subcontractor and Affiliates whose name and address are set out in Section Two of the First Schedule (hereafter called the "Assembler"), And 2. Fairchild Semiconductor Corporation and Affiliates (hereafter called "FSC"), whose name and address are set out in Section Three of the First Schedule. Whereas: 1. FSC is engaged in the business of designing, manufacturing and marketing semiconductor devices. 2. Assembler is engaged in the business of manufacturing various electronic components and semiconductor devices. 3. This assembly agreement is applicable only to the list of packages referenced in Section One and Two of the Second Schedule. 4. The parties mutually desire that the Assembler assemble certain integrated circuits designed by FSC subject to the terms and conditions below. 5. The parties also mutually desire that the Assembler provide final test service on devices listed in the Second Schedule, Section One. NOW, THEREFORE, the parties hereto agree as follows: 1. SCOPE OF WORK a) Assembler shall perform certain semiconductor assembly and final test work for FSC. The semiconductor devices (hereafter called "Devices") shall be assembled and/or tested in a good and workmanlike manner in accordance with Assembler's standard specifications and FSC's specific specifications. b) The devices shall be boxed and bar code labelled to FSC specification. c) Notwithstanding anything contained herein to the contrary, FSC reserves the right to engage any other subcontractor to perform any assembly and/or final test work on a per need basis. This agreement shall in no way be interpreted or construed to be an exclusive dealing with the Assembler. 2 2. TERMS The term of this Agreement is as stipulated in Section Four of the First Schedule. FSC will notify Assembler in writing 90 days prior to the expiration of this Agreement whether or not it desires to renew this Agreement. Should FSC desire such a renewal, then both parties will enter into a good faith negotiation. Failure by FSC to provide such notice to Assembler shall be deemed to be notice by FSC that it does not desire to renew this Agreement, then Assembler should make reasonable effort to begin a dialogue with FSC concerning the plans of both parties. 3. DEFINITIONS Key definitions of terms that apply in this agreement are contained in the Fourth Schedule. 4. MATERIALS/FACILITIES a) Assembler shall supply all materials and equipment related to the assembly except for the items listed in Section Five of the First Schedule. b) Assembler shall ensure that all materials and assembly processes used to assemble FSC's Devices are free of ODC's (Ozone Depleting Chemicals). c) Assembler shall be responsible for supplying the assembly and final test facilities and all equipment (unless otherwise set forth in this Agreement) and personnel necessary to perform assembly and/or test work contemplated hereunder. Unless Assembler has received FSC's prior written consent otherwise, all assembly and/or test work shall be performed at the facility specified in Section Two of the First Schedule hereto. [need to add KL location to Section Two of the First Schedule] d) FSC agrees to accept the liability for any unique raw materials that the Assembler has purchased for FSC's Devices, if unused for more than 6 months beyond the forecast period for which they were purchased or beyond the expiration date of shelf life of the material, whichever occurs first, for a maximum of one month of inventory plus one month on order, provided that the Assembler has purchased this inventory using FSC's forecast as shown in Section One of the Second Schedule and observed reasonable lead times provided by the vendor. e) For standard or non-unique materials Assembler shall notify FSC of the quantity and description of all such excess materials on hand and shall make every reasonable effort to mitigate the loss due to FSC's non-consumption of all such purchased excess supplies and raw materials by attempting to make use of such excess supplies and raw materials in the fulfillment of other 3 customers' packaging and testing orders. FSC shall be responsible for reimbursement of up to one month inventory plus up to one month on order for any portion not able to be used for other Assembler customers within the expiration date of shelf life of the materials. Any excess to this amount is the responsibility of the Assembler. 5. ASSEMBLY PLAN a) For information and planning purposes, FSC will provide Assembler with a rolling 4 week forecast each week, and six month rolling forecast at least once per monthly period with quantities by package type (and wire count/stitch count for TO220, DPAK & D2PAK) as shown in Section One of the Second Schedule. b) A new forecast ("Forecast") shall be due from FSC during the third week of each monthly period (under FSC's fiscal year calendar) and Assembler shall respond to the Forecast with a capacity commitment for at least one hundred percent (100%) firm assembly commitment for the first period within two (2) working days as long as the Forecast for that first period is not higher than that committed to by Assembler for the immediately preceding period In the event of an FSC request for additional capacity above Assembler's available capacity then Assembler shall respond with a proposal within 5 working days. Assembler's commitment shall be based on the monthly capacity commitment divided by the number of Assembler's work days in the period, as a daily capacity commit. In the event FSC does not load die in a linear manner, then the capacity for any day for which there is insufficient die loaded by FSC to meet the daily capacity commit shall be subtracted from the Assemblers commitment for the period Additionally, for TO220, DPAK (TO251/252) and D2PAK (TO262/263), FSC shall be obligated to load a minimum of [redacted *] of the Base Unit Volume as shown in Attachment A of the Second Schedule or [redacted *] of FSC's total subcontract volume, whichever is less, assuming the demand is based on the same or similar fit, form and functionally equivalent design and same or similar material set as is used on FSC's P division products or for similar products from from other FSC divisions for which Assembler has been qualified (either those packages and/or material sets qualified now or any changes mutually agreed to by both parties in the future). FSC agrees to qualify a sufficient number of products from other divisions that can use the same or similar design and same or similar material sets as needed, to help insure that FSC can meet the minimum loading guarantee. In the event that FSC's total demand for any given package family covered by this minimum volume guarantee is insufficient to meet [redacted *] of the Base Unit Volume, then FSC agrees to load an equivalent volume of a mutually a agreed to alternate package type, assuming Assembler has sufficient capacity to load the alternate package type, and is qualified, and assuming that [redacted *] of FSC 4 ______________ * Confidential treatment requested. cummulative Subcontract demand for all TO220, DPAK and D2PAK package types exceeds 110% of the cumulative Threshold Volume. Assembler agrees to make available the minimum capacity as shown in the Fifth Schedule of this agreement, provided there is a written forecast for consumption at least one (1) period prior to FSC's demand. Assembler will use all commercially reasonable efforts to provide capacity to FSC for any upside demand. In the event that FSC adds capacity for these packages in any FSC factory, then both parties agree to re-negotiate pricing and loading guarantees in good faith. Based on the Forecast provided by FSC, Assembler shall ensure that the proportionate average daily capacity is available each week to enable linear loading of FSC's orders, within the Assembler's capacity commitment. FSC shall make reasonable effort to ensure linear loading to the Assembler. c) If Assembler starts factory program material more than thirty (30) days ahead of customer's request date, then the Assembler assumes liability for the total value of the product unless the starts are authorized by FSC. 6. PRICES a) The prices to be paid by FSC for devices assembled and/or tested pursuant to this agreement shall be mutually agreed to by both Assembler and FSC and set forth in a Letter Agreement between Assembler and FSC signed by each party. Such pricing will be expressed in U.S. Dollars. Prices shall be negotiated on an annual basis, as a minimum, except as otherwise noted on the Pricing Agreement or as outlined in section 6(c) below. Updates shall be permitted when mutually agreed upon between Assembler and FSC. Yields used in determining the pricing shall be reviewed on an annual basis, as a minimum. The parties shall document pricing updates in writing. b) All prices are to be expressed in terms of unit pricing that include all the materials supplied by the Assembler unless otherwise specified. Pricing shall reflect whether product is to be standard packed in tubes or packed utilizing tape and reel. Exceptions will be paid via SRF (Service Request Form). c) Prices for Power Discrete Packages outlined in Attachment A of the Letter Agreement between Assembler and FSC shall be effective through December 31, 2002, then all Base Unit Prices and Incremental Unit Prices shall be subject to a [redacted *] discount from January 1, 2003 through December 31, 2003, and thereafter shall be subject to [redacted *] prices on an annual basis. Pricing for Unit Adders shall remain as shown in Attachment A of the Letter Agreement between Assembler and FSC for the life of this agreement. Prices for IC Packages and/or test services as as outlined in Attachment B of the Letter Agreement between Assembler and FSC shall be effective through 5 ______________ * Confidential treatment requested. December 31, 2002, and then shall be subject to [redacted *] prices thereafter on an annual basis Any applicable Lot Charges for any services provided by Assembler to FSC shall be per Attachment C of the Letter Agreement between Asembler and FSC for the life of the agreement. In the event Assembler does not meet [redacted *] prices after December 31, 2003, then FSC shall not be obligated to load the minimum volumes as specified in Section 5(b). Any cost improvement or steps taken by FSC to reduce the existing cost shall all accrue to FSC, and shall result in a revised Pricing Agreement in the period immediately following the identification, acceptance and actual implementation of reduction by the Assembler. Assembler agrees to implement such cost reductions as soon as is commercially viable after acceptance provided that implementation does not require Assembler to incur any unusual or new costs or does not require Assembler to make additional investment in capital equipment. In the event any such FSC cost improvement inititiative, requires Assmelber to incur any unusual or new costs or invest in equipment, then the parties agree to negotiatie sharing of these costs or sharing in the cost reduction in good faith. Any cost reduction generated by the Assembler through the use of improved materials or improved utilization or efficiency of equipment and/or operators being employed shall benefit the Assembler, provided no FSC qualification or FSC customer PCN is required. If qualification or PCN is required by FSC for Assembler to implement the improvement, then the parties agree to negotiate sharing of the cost reduction in good faith . Any cost reduction generated jointly by the FSC and Assembler through the use of improved materials or improved utilization or efficiency of equipment and/or operators being employed shall benefit both parties equally, and shall result in a revised Pricing Agreement in the period immediately following the identification, acceptance and implementation of reduction by the Assembler. d) New products introduced by FSC for the Assembler to assemble and/or final test shall be priced through mutual agreement between FSC and Assembler. Pricing of new products shall follow the format mutually agreed to in the Pricing Agreement by both Assembler and FSC. Assembler shall be used as the Preferred Subcontractor on all new package types that FSC intends to build at Subconcontractors, subject to [redacted *], and continued performance to FSC quality and delivery standards, and provided that the capacity is available when FSC requires. 7. PAYMENT TERMS a) Payment to Assembler by FSC shall be made on a Net Thirty (30) Days basis from the date of invoice, if not specified otherwise in Section Three of the Second Schedule. 6 ______________ * Confidential treatment requested. b) All payments shall be made in United States dollars (US$) unless specified otherwise in Section Three of the Second Schedule. 8. TURNAROUND TIME Assembler shall use its best efforts to ship Devices (assembly only or assembly and test) in the turnaround times indicated in the Third Schedule of this document a) The Turnaround Time shall mean the elapsed number of calendar days from the date of the Die or assembled unit shipment arrives at the factory of Assembler's manufacturing location, or date the die is requested to be built, whichever is later, and the date assembled and / or tested Devices are shipped out of the same factory, or if Assembler is providing PDC services the date the finished Devices are placed into the PDC center and available for shipment. Turnaround Time shall not include Holidays and Sundays at Assembler's location. 9. YIELD a) Assembler shall use its best efforts to meet the Assembly/ Test Yields defined in Section Four of the Second Schedule. b) Assembly yield shall be measured by acceptable assembled Devices shipped versus the number of good die the Assembler received and shall be assessed over a calendar quarterly period on a per package and per lead count basis. Any yield losses due to die count variances, wafer-process or die related losses shall be excluded from the quarterly yield computation. Should the quarterly yield performance fall [redacted *] below the minimum contract yeildspecified in Section Four of the Second Schedule, Assembler shall submit a specific explanation to FSC for review and FSC is entiltled at a minimum, to debit Assembler's account the dollar amount cost of the die. c) Should the yield performance fall at least [redacted *] below minimum contract yield that is specified in Section Four of the Second Schedule on a lot to lot basis, Assembler shall notify FSC immediately. A specific explanation in the standard report format shall be submitted to FSC for review within the next seven (7) days. d) For assembly of untested Devices only, FSC will perform "First Test" testing on the Devices received from the Assembler at FSC's test location and will report the test results to Assembler on a weekly basis, or as and when the need arises, to assist Assembler in monitoring its assembly performance. e) FSC reserves the right to reprocess finished goods that do not conform to FSC specifications in an effort to maximize utilization of its inventories. 7 ______________ * Confidential treatment requested. Procedures and pricing of any such reprocessed materials shall be mutually agreed upon between Assembler and FSC. f) FSC shall have the right to enter arbitration for possible termination of this Agreement should Assembler be unable to meet the agreed upon yield levels within ninety (90) days of notification from FSC. Arbitration shall be per the provisions of Section 20 of this agreement. 10. PROVISION OF DIE a) FSC shall consign die and/or assembled units to Assembler for assembly and/or test work. b) Assembler shall not use uncommitted die for assembly prior to receiving specific loading instructions from FSC or its designated receiving location. 11. SHIPMENT a) All shipments of die and material from FSC to Assembler will be as shown in Section Three of the Second Schedule. FSC agrees to be invoiced for and pay the freight costs incurred by Assembler for any die, consigned equipment or material provided to it by any other FSC subcontractor. b) All shipments of assembled and/or tested Devices from Assembler to an FSC location will be made in accordance with Section Five of the Second Schedule. If Assembler is paying freight on behalf of FSC then manual billing should be done on a per shipment basis. c) Assembler is required to use the freight forwarder nominated by FSC for shipment of assembled Devices. Assembler shall ensure that all export controls and licenses are in place between Assembler's location and FSC's regional warehouses and shipments made directly to FSC's customers per FSC's instructions. d) FSC shall export all die and all other materials on its own export license to Assembler and FSC will be the importer of record upon the return shipment of Devices through the applicable port of entry. 12. ACCEPTANCE a) FSC's acceptance or rejection of assembled and/or tested Devices shall be based on the Specifications. FSC shall have the right to reject isolated lots or groups of lots assembled and/or tested Devices at its incoming or designated receiving location that do not conform to the Specifications. FSC shall 8 complete acceptance testing of Devices within 30 days of receipt from Assembler. b) FSC shall notify Assembler of any rejections that exceeds the AQL Limits per specifications and upon the request of Assembler, shall promptly ship such rejected samples to Assembler for verification, whereby such rejection shall be limited to the corresponding lot of the samples. The lot shall be limited to all the material produced under a specific date code. c) Assembler shall have seven (7) business days to reply to FSC's notification and upon agreeing that the rejection is caused by assembly workmanship deficiency, the rejected lots, if reworkable, shall be returned to Assembler for rework and Assembler will pay all associated freight costs. If the rejected lots are non-reworkable, FSC is entitled at a minimum, to debit Assembler's account the dollar amount in the Assembler's original invoice. Thjs rejected quantity shall also be adjusted on the quarterly average yields for the period that said devices were assembled and this adjusted yield shall be used to determine if die cost compensation shall be due as outlined in Section 9(b). However, the final dollar amount to be debited from the Assembler's original invoice shall be determined by mutual agreement between FSC and the Assembler. The preferred method for FSC to achieve any such debit shall be for the Assembler to issue a credit memo for the appropriate amount to aid in reconciliation of account balances. d) FSC shall have the right, at its expense, to employ one or more inspectors, or professional or technical personnel or its designees, with access to Assembler's facility to inspect the processes, materials and FSC's Devices and to perform quality audit. In the event that the Quality Inspector discovers any non-compliance by the Assembler with respect to the specifications, the Quality Inspector may, in all fairness, suspend the manufacturing activities of the Assembler after such non-compliance is acknowledged by the Assembler. 13. CHANGE OF SPECIFICATIONS a) Assembler shall advise FSC in writing at least ninety (90) days prior to making any proposed changes with respect to direct materials, suppliers, manufacturing processes and/or assembly location. FSC reserves the right in its absolute discretion to accept or reject such proposed changes. Upon obtaining the conceptual acceptance of the proposed changes from FSC, Assembler shall perform and provide the relevant reliability data and/or build qualification lots per FSC's requests at Assembler's expense. Proposed changes shall be implemented on a cut-off date mutually determined by both parties upon obtaining final approval from FSC. b) Assembler agrees to use its best efforts to implement all reasonable proposals for improvement of specifications suggested by FSC. 9 c) Assembler shall use its best efforts to participate in quality and yield enhancement programs as suggested by FSC. d) Assembler shall not be required to implement any change where the cost is shown to exceed the benefit anticipated unless mutually agreed to by both parties. e) FSC's only recourse for changes not implemented by the Assembler, and not accepted by FSC, is to cancel unfilled orders 14. MANUFACTURING DATA a) Assembler shall provide FSC the manufacturing data deemed necessary as agreed to between Assembler and FSC. It shall include the amount at die and package level of Assembler's die bank, WIP, and stagnant inventories. Assembler shall be able to provide FSC on a weekly basis, a summary of shipping activity and die receipts. Assembler shall provide FSC weekly reports regarding assembly and test yields, as well as cycletimes for both assembly only and assembled/tested products at the package level. Assembler shall also provide FSC with any other information FSC reasonably requests. The format for stated data shall be as mutually determined between Assembler and FSC. b) Wherever possible, Assembler agrees to allow FSC to establish a computer-link with the Assembler's computer system to enable quick access to data related to FSC's Devices only. The access to data shall be production data only and shall not include financial data. 15. MANUFACTURING LOT a) Assembler shall ensure that no manufacturing lot shall consist of more than one die lot unless directed by FSC. At Assembler's discretion, large die lots can be broken down into smaller manufacturing lots. b) Assembler shall try to use the unique manufacturing lot number assigned by FSC to ensure FSC's tracking system is supported. The lot number shall appear on the Lot Traveler together with FSC's Device code. The Assembler shall also maintain the lot number given by FSC to ensure FSC's tracking system is also supported. 10 16. REJECTED DIE & REJECTED ASSEMBLED UNITS FSC may at its discretion, request all rejected die and rejected assembled and/or tested Devices be returned by the Assembler, or otherwise to be destroyed by the Assembler. Such destruction, if desired, shall be witnessed by FSC personnel or alternatively, FSC may request the Assembler to issue a letter of assurance to that effect. In case of a return, FSC shall pay all associated freight costs. 17. U.S. EXPORT/IMPORT LAWS Assembler shall comply with all applicable U.S. Import and Export Laws and Regulations, as well as the local laws that are applicable at Assembler's locations performing work for FSC. Assembler shall meet such requirements, like Country of Origin marking on each marking on each package as requested by FSC, in order to ensure full compliance with such Laws. The provisions of this Section 17 shall survive the termination of this Agreement and continue indefinitely. 18. WARRANTY a) The assembled and/or tested Devices sold by Assembler to FSC shall be in good condition, free of defects in material and workmanship (except with regard to die supplied by FSC to which Assembler warrants only workmanship) for a period of twelve (12) months after the date of acceptance by FSC. b) In the event of assembled and/or tested Device failure proven (by way of failure analysis) to have been caused by defects in workmanship, Assembler shall, at FSC's option, issue credit for the dollars amount of the assemblers original invoice of the relevant Devices to FSC, or assemble similar Devices for FSC at no charge. Thjs defective quantity shall also be adjusted on the quarterly average yields for the period that said devices were assembled and this adjusted yield shall be used to determine if die cost compensation shall be due as outlined in Section 9(b). c) Assembler shall have no obligation under any warranty set forth above in the event that; o the Devices have failed as a result of normal wear and tear, catastrophe or fault or negligence of FSC or it's customers; o the Devices have been modified by FSC or its customers in a way which affects the performance of the Devices; o the Devices have not been stored, maintained, or used by FSC or its customers in accordance with FSC's standard operating and/or maintenance instructions. 11 d) Assembler shall not be liable or responsible for damages arising directly or indirectly from the sale, use or failure of any semiconductor devices assembled or tested by Assembler. 19. INSURANCE FSC will be responsible for insurance coverage for all consigned materials and equipment in-transit to Assembler. FSC will be responsible for insurance on assembled and tested product shipped by Assembler once it is transferred to FSC's designated freight forwarder. 20. INDEMNIFICATION a) Each Party (the "Indemnifying Party"), at its own expense and cost, shall defend any suit, claim or legal proceeding against the other Party (the "Indemnified Party") for the infringement of patents or trademark, or claims based on allegations of copyright, trade secret or other proprietary right infringement, by the Indemnifying Party. The Indemnifying Party shall pay all damages and costs which may be awarded against the Indemnified Party because of such infringement by the Indemnifying Party. Assembler shall have no obligation under this section to the extent than any alleged infringement is based on Assembler's implementation of specifications provided by FSC, or if due to modifications or combination with other devices by FSC or its customers. b) The Indemnifying Party's duties under the immediately preceding paragraph (a) are conditional upon the Indemnified Party furnishing to the Indemnifying Party prompt written notice of the commencement of any suit or proceeding or any claim of infringement and a copy of each written communication relating to the alleged infringement, and giving to the Indemnifying Party authority and reasonable assistance (at the Indemnifying Party's expense and cost) to defend or settle such law suit, proceeding or claim. The Indemnifying Party shall not be bound by any settlement made without its prior consent. 21. TERMINATION a) Either party may terminate this Agreement by giving notice in writing to the other party in the event the other party is in material breach of this Agreement and shall have failed to cure such breach within thirty (30) days of written notice thereof from the first party. b) Either party may terminate this Agreement by giving notice in writing to the other party, 12 which notice shall be effective upon receipt by the other party, should the other party file a petition of any type as to its bankruptcy, be declared bankrupt, become insolvent, make an assignment for the benefit of creditors, go into liquidation or receivership or otherwise lose legal control of its business. c) Either party may terminate this Agreement by giving notice in writing to the other party should an event of Force Majeure continue for more than ninety (90) days. d) Termination of this Agreement shall not release either party from the obligation to make payment of all amounts then due and payable. e) In the event of termination, Assembler shall upon written request of FSC return all die, materials, equipment and technical documents FSC has previously provided to Assembler, with freight costs to be paid by FSC. f) Upon termination of this Agreement other than by FSC pursuant to Section 21(a) or (b), FSC shall, and in case of termination by FSC under Section 21(a) or (b) FSC shall have the option to purchase from Assembler all work-in-progress (WIP), all assembled and tested Devices in Assembler's stock at the established contract pricing, and any raw materials in accordance with Section 4(d) herein, provided these WIP and Devices are assembled in accordance with the Specifications. 22. FORCE MAJEURE Either party shall be excused from performance or performance delayed by reason of any force majeure, strikes, accidents, embargoes, acts of government or other cause beyond control of such party which renders performance impossible. FSC or Assembler may, at its option, cancel or reschedule that portion of the performance of this Agreement by such cause. Such rescheduling shall be upon mutual consent of both parties. If the force majeure exists for more than 3 months, FSC may terminate this Agreement without any liability to the Assembler, and Assembler will return all FSC's dies, WIP and Finished Goods, and any Consigned Equipment, with freight costs to paid by the Assembler. 23. ENTIRE AGREEMENT a) The Schedules referred to and attached to this Agreement and the Letter Agreement between Assembler and FSC are hereby incorporated and by this reference made a part hereof. The relevant sections of the Schedules, whenever necessary, shall be updated to include any changes and additional new business plans agreed between the parties. The revised Schedules signed by the duly authorized officers of the respective parties, shall become the addendum of the original Schedules and by this reference made part hereof. 13 b) This Agreement, together with the Schedules hereto, contains the entire understanding of the parties and supersedes any prior or contemporaneous agreements or understanding between the parties with respect to the subject matter hereof. Without limiting the generality of the foregoing, this Agreement supersedes and replaces in its entirety that certain Supply Agreement and Letter Agreement between Assember and Intersil Corporation, dated as of June 30, 2000, as partially assigned to FSC on March 16, 2001, which Supply Agreement and Letter Agreement shall no longer have any force or effect as between Assembler and FSC. c) No amendment or modification of this Agreement shall be valid and binding upon the parties unless signed by the duly authorized officers or representatives of the respective parties. 24. WAIVER Should any party fail to enforce any provision of this Agreement or to exercise or waive any right in respect hereto, such failure or waiver shall not be constructed as constituting a waiver or a continuing waiver of its rights to enforce such provisions or right or any other provision or right. 25. AGENCY a) The relationship of the parties under this Agreement shall be as independent contractors. b) Nothing contained herein or done in pursuance of this Agreement shall constitute the parties as entering upon a joint venture or partnership, or shall constitute either party being an employee of the other party for any purpose or in any sense whatsoever. 26. INVALIDITY If any provision of this Agreement or the application thereof to any situation or circumstance shall be invalid or unenforceable, the remainder of this Agreement shall not be affected, and each remaining provision shall be valid and enforceable to the fullest extent. In the event of such partial invalidity, the parties shall seek in good faith to agree on replacing any such legally invalid provision with provisions which in effect will, from an economic viewpoint, most nearly or fairly approach the effect of the invalid provision. 14 27. COUNTERPARTS This agreement may be executed simultaneously in several duplicate originals in the English Language, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 28. JURISDICTION The Agreement shall be governed by, and interpreted and construed in accordance with the Laws the State of California 29. CONFIDENTIALITY a) For the purposes of this Agreement, "Confidential Information" shall mean all proprietary information relating to the subject matter of this Agreement which (1) is disclosed by one of the parties to the other in written, graphic and/or computer data form and originally designated in writing by the disclosing party as "Confidentiality Information" or by words of similar import, or (2) if disclosed orally is designated as "Confidential Information" at such time and is summarized and confirmed in writing within thirty (30) days after oral disclosure that such orally disclosed information is "Confidential Information", or (3) whether or not designated as provided in clauses (1) or (2) above, consists of emails, letters, agreements, contracts, request for quotations (RFQs), build diagrams, bills of materials, test programs, product preliminary specifications, engineering drawings of testers, fixtures and/or test jigs. b) Each party acknowledges and agrees that all Confidential Information is confidential or proprietary to the disclosing party. Each party agrees not to use any such Confidential Information during the term of the Agreement and for an additional period of Seven (7) years for any purpose other than as permitted or required for performance by such party hereunder. Each party further agrees not to disclose or provide any of such Confidential Information to any third party and to take all necessary measures to prevent such disclosure using the same standard of care it normally uses in protecting its own trade secrets and proprietary information. c) Notwithstanding any other provision of this Agreement, no information received by a party hereunder shall be or remain Confidential Information if the party receiving or possessing said information can demonstrate that said information was or is, as the case may be: o published or otherwise made available to the public other than as a result of a breach of this Agreement; 15 o furnished to a party hereunder by an independent third party not in violation of a duty of confidentiality of that third party to the other party hereunder and without restriction on its dissemination; o approved for release in writing by the party designating said information as Confidential Information; o known to or independently developed by the party receiving Confidential Information hereunder without access to the said Confidential Information; o disclosed to a third party by the party transferring said information hereunder without restricting its subsequent disclosure and use by the third party. d) Disclosure of any Confidential Information by a party hereto shall not be precluded if such disclosure is in response to a valid order of a court or other government body, provided that the receiving party promptly notifies the other party of such order and makes a good faith effort, at the expense of the party which originally disclosed the information, to obtain, or assist the other party to obtain, a protective order requiring the Confidential Information so disclosed be kept in confidence and used only for the purpose for which such order was issued. 30. ARBITRATION Any default condition by either party, that is not remedied and that would lead to possible termination of this agreement are to be resolved by Arbitration prior to termination per the requirements of this section. This Arbitration process shall be concluded in the United States and governed by, and construed in accordance with, the laws of the State of California, USA. The Parties shall use their best efforts to settle by way of amicable negotiations any differences which may occur between them in connection with this Agreement. If the Parties fail to reach such an amicable settlement, either party may submit such differences to arbitration, which shall have sole jurisdiction and shall take place in accordance with the following minimum set of rules: a) The rules of the International Chamber of Commerce (ICC) shall apply. b) The arbitration shall be held by a single arbitrator mutually acceptable to both Parties. If the Parties cannot agree on a single arbitrator, each Party shall identify one independent individual who shall meet to appoint a single arbitrator. c) The decision of the arbitrator shall be considered as a final and binding resolution of the disagreement and may be entered as judgment in any court of competent jurisdiction. d) The arbitration shall be held in a mutually agreeable location. 16 IN WITNESS WHEREOF, the parties hereto have hereunto set their hands the day, month and year first above written. ChipPAC Limited SIGNED by: In the presence of: /s/ Patricia H. McCall /s/ Jeffrey S. Braden - --------------------------------------- -------------------------------- Name: Patricia H. McCall Name: Jeffrey S. Braden Title: Director Title: Vice President Date: February 8, 2002 Date: February 8, 2002 Fairchild Semiconductor Corporation. SIGNED by In the presence of: /s/ Tan Hock Seng /s/ K.T. Tam - --------------------------------------- -------------------------------- Name: Tan Hock Seng Name: K.T. Tam Title: Director - Strategic Procurement Title: Vice President, Operations & Subcon Management Date: February 18, 2002 Date: February 25, 2002 17 FIRST SCHEDULE - -------------------------------------------------------------------------------- SECTION ONE: DAY/MONTH/YEAR OF THIS AGREEMENT - -------------------------------------------------------------------------------- 1st day of January, 2002 ------------------------ - -------------------------------------------------------------------------------- SECTION TWO: Chip PAC LIMITED & AFFILIATES - -------------------------------------------------------------------------------- Company Name: ChipPAC Limited --------------------------------------------- Address: See Attached A for Names and Addresses For ChiPAC Limited and Affiliates --------------------------------------------- --------------------------------------------- Country: --------------------------------------------- - -------------------------------------------------------------------------------- SECTION THREE: FAIRCHILD SEMICONDUCTOR CORPORATION & AFFILIATES - -------------------------------------------------------------------------------- Location Name: Fairchild Semiconductor --------------------------------------------- Address: 82 Running Hill Road, --------------------------------------------- South Portland --------------------------------------------- Maine 04106 --------------------------------------------- U.S.A. --------------------------------------------- - -------------------------------------------------------------------------------- SECTION FOUR: TERMS OF AGREEMENT - -------------------------------------------------------------------------------- Effective Date: January 1st, 2002 Expiration Date: December 31, 2003 - -------------------------------------------------------------------------------- SECTION FIVE: MATERIALS/EQUIPMENT CONSIGNED BY FAIRCHILD - -------------------------------------------------------------------------------- See Attachment B of this First Schedule for list of equipment owned by FSC. - -------------------------------------------------------------------------------- 18 ATTACHMENT A NAMES AND ADDRESSES OF CHIPPAC LIMITED AND AFFILIATES CHIPPAC LIMITED, Crigmuir Chambers, Road Town, Tortola, British Virgin Islands CHIPPAC MALAYSIA 73, Lorong Enggang, Ulu Kelang Free Trade Zone, 54200 Kuala Lumpur, Malaysia CHIPPAC KOREA San 136-1, Ami-Ri, Bubal-Eub, Ichon-Si, Kyoungki-Do, 467-701 Korea CHIPPAC SHANGHAI 188 Hua Xu Road, Xujin Zhen, Qinpu District, Shanghai 201-702, People Republic of. China 19 ATTACHMENT B EQUIPMENT OWNED BY FSC* EQUIPMENT TAG # Specific Equipment List will be included in the contract. * As of 1st day of January 2002: Ismecca Known Good Die Machine 20 SECOND SCHEDULE - -------------------------------------------------------------------------------- SECTION ONE: VOLUME FORECAST - -------------------------------------------------------------------------------- PACKAGE LEAD PRODUCT VOLUME FORECAST TYPE TYPE TYPE PD PD PD PD Note: Minimum forecast for Power Discrete shall be per the Base Unit Volume listed in Attachment A of the Letter Agreement between Assembler & FSC. ASSEMBLY Minimum [redacted *] Rolling Assembly Forecast That Is Submitted Each Period FINAL TEST Minimum [redacted *] Rolling Test Forecast that is submitted Each Period - -------------------------------------------------------------------------------- SECTION TWO: PRICES - -------------------------------------------------------------------------------- PACKAGE LEAD UNIT PRICING(CENTS) TYPE TYPE Note: Per Price Schedule in Attachments A,B, & C of the Letter Agreement between Assembler & FSC. - -------------------------------------------------------------------------------- SECTION THREE: - -------------------------------------------------------------------------------- PAYMENT TERM Net 30 days from the receipt of the finished goods or from the issuance date of Bill of Landing or Air Waybill in case of direct shipment to overseas from Assembler, and for products for which supplier provides PDC services, the payment shall be made Net 30 days from the time the finished goods are entered into the FSC "Peouple Soft Inventory System" and placed into the PDC. Invoices are payable in United States Dollars DELIVERY TERM: A) Inbound Shipment (Shipment of die and material from FSC to Assembler): CIF Assembler factory that is providing the service B) Outbound Shipment (Shipment of assembled and/or tested devices from Assembler to FSC Location) shall be FOB EX-Works. - -------------------------------------------------------------------------------- 21 ______________ * Confidential treatment requested. SECOND SCHEDULE - -------------------------------------------------------------------------------- SECTION FOUR: YIELDS - -------------------------------------------------------------------------------- STANDARD YIELDS REMARKS ASSY Cum See Attachment A of this Second Schedule Test Cum Total Cum - -------------------------------------------------------------------------------- SECTION FIVE: SHIPMENT SENT TO - -------------------------------------------------------------------------------- 1) Products: Attention: "Ship To" addressing shall be to the persons/address called out on the PO, Release order or other agreed to documents from FSC Company Name: Address: - -------------------------------------------------------------------------------- SECTION SIX: MANUFACTURING DATA - -------------------------------------------------------------------------------- Periodic trend reports in QOS format on : 1) Yield 2) LAR/PPM 3) Cycletime 4) On time Delivery - -------------------------------------------------------------------------------- 22 SECOND SCHEDULE - ATTACHMENT A MANUFACTURING YIELD TARGETS [redacted *] 23 _____________ * Confidential treatment requested. THIRD SCHEDULE CYCLE TIME TARGETS [redacted *] ______________ * Confidential treatment requested. 24 FOURTH SCHEDULE - DEFINITIONS 1 "Affiliate" of any particular Person means any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with such Person. For purposes of this definition, a Person shall be deemed to be in "control" if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the Person in question, whether through the ownership of voting securities, by contract or otherwise. 2 [redacted *] 3 [redacted *] 4 "Preferred Subcontractor" shall mean that Assembler shall be given the priority to quote for any new package configurations required by FSC from a third party contract assembler that are not of the type for which packaging and/or test services are provided by Assembler to FSC nor provided to FSC by other third parties as of the Effective Date. Additionally, in the event that Assembler provides a competitive quote (including price, capacity, leadtime, etc), then Assembler shall be given preferential consideration for award of the business by FSC. 25 _____________ * Confidential treatment requested. FIFTH SCHEDULE - MINIMUM CAPACITY GUARANTEE - ------------------------------------------------------------------- PACKAGES WEEKLY MIN CAPACITY (K UNITS) - ------------------------------------------------------------------- D2PAK (TO262/263) &TO220A [redacted *] - ------------------------------------------------------------------- DPAK (TO251/252) [redacted *] - ------------------------------------------------------------------- T0220 [redacted *] - ------------------------------------------------------------------- T0202 [redacted *] - ------------------------------------------------------------------- TO218 [redacted *] - ------------------------------------------------------------------- TO247 [redacted *] - ------------------------------------------------------------------- HEXDIP [redacted *] - ------------------------------------------------------------------- TO39 HIREL [redacted *] - ------------------------------------------------------------------- 26 _______________ * Confidential treatment requested. EX-23.1 12 dex231.txt CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 No. (333-54628) and Forms S-3 No. (333-69704 and 333-73674) of ChipPAC, Inc. of our reports dated January 30, 2002, except for Note 20, as to which the date is February 14, 2002, relating to the financial statements and financial statement schedule, which appear in this Form 10-K. /s/ PricewaterhouseCoopers LLP San Jose, California March 29, 2002 EX-99.1 13 dex991.txt RISK FACTORS EXHIBIT 99.1 CHIPPAC, INC. RISK FACTORS You should carefully consider the following factors in addition to the other information set forth in this document in analyzing an investment in the Class A common stock, 12.75% senior subordinated notes or 8% convertible subordinated notes of ChipPAC, Inc. We believe that the risks and uncertainties described below are the current material risks facing us. If any of the following risks actually occur, our business, financial condition or results of operations will likely suffer. In that case, the trading price of our publicly traded Class A common stock, 12.75% senior subordinated notes or 8% convertible subordinated notes could fall and you may lose all or part of the money you invested. Risks Related to Our Business Failure to comply with any of our existing covenants in our senior credit facilities would constitute a default under the senior credit facilities. An event of default under any debt instrument, if not cured or waived, could have a material adverse effect on us. The weakness in demand for packaging and test services as a result of the current downturn in the semiconductor industry has and is expected to continue to adversely affect our cash flow from operations. We believe that our existing cash balances, cash flows from operations, available equipment lease financing and available borrowings under our senior credit facilities provide sufficient cash resources to meet our projected operating and other cash requirements for the next twelve months. We have signed an amendment to our senior credit facilities pursuant to which, among other things, our senior lenders waived compliance with our financial covenants until December 31, 2002 and replaced those covenants with new covenants that apply for the year ended December 31, 2002, which we believe better reflect current conditions in the semiconductor industry. We cannot assure you that we will be able to remain in, compliance with all of our other existing covenants. Failure to comply with any of our existing covenants would constitute a default under the senior credit facilities. A default could cause a cross default under the indenture for our senior subordinated notes, which in turn could cause a substantial majority of our aggregate indebtedness to become due and payable immediately. An event of default under any debt instrument, if not cured or waived, could have a material adverse effect on us. Our operating results for the year ended December 31, 2001 declined significantly from the year ended December 31, 2000. Our gross margins, net income and operating income for the year ended December 31, 2001 decreased as compared to our results in the year ended December 31, 2000, as a result of a decline in our revenue. Our revenue for the year ended December 31, 2001 was $328.7 million, compared to $494.4 million in the year 2000. The decline is attributable to the continued semiconductor industry demand slowdown and resulting inventory buildup caused by ongoing end market demand weakness. We cannot assure you that our business will not continue to decline or that our performance will improve. We may not be able to continue to implement our cost saving strategy. Even if we do, it may not reduce our operating expenses by as much as we anticipated and could even compromise the development of our business. In response to the recent weakness in demand for semiconductors, we implemented cost saving measures, including significant reduction in our workforce, furloughs, reduced work shift schedules, reductions in discretionary spending, reduced materials cost and lower capital expenditures and redesign of our manufacturing processes to improve productivity. As a result of these cost saving measures, we have incurred approximately $2.9 million in restructuring charges during the year ended December 31, 2001. Additionally, we expect there to be approximately $3.3 million in charges in 2002. 1 However, we cannot assure you that these cost saving measures will increase productivity or that the expected net savings will occur during this period or at any other time in the expected amounts, if at all. In fact, our cost saving measures could adversely affect our revenue, as it could create inefficiencies in our business operations, result in labor disruptions and limit our ability to expand and grow our business. The cyclicality of the semiconductor industry could adversely affect our operating results. Our operations are substantially affected by market conditions in the semiconductor industry, which is highly cyclical and, at various times, has experienced significant economic downturns characterized by reduced product demand and production overcapacity which can result in rapid erosion of average selling prices. Since the end of 2000 we have experienced a general slowdown in the semiconductor industry. Our profitability is affected by average selling prices which tend to decline. Decreases in the average selling prices of our packaging and test services can have a material adverse effect on our profitability. The average selling prices of packaging and test services have declined historically, with packaging services in particular experiencing severe pricing pressure. This pricing pressure for packaging and test services is likely to continue. Our ability to maintain or increase our profitability will continue to be dependent, in large part, upon our ability to offset decreases in average selling prices by improving production efficiency, increasing unit volumes packaged or tested, or by shifting to higher margin packaging and test services. If we are unable to do so, our business, financial condition and results of operations could be materially and adversely affected. If we are unable to develop and market new technologies, we may not remain competitive within the semiconductor packaging industry. The semiconductor packaging and test industry is characterized by rapid increases in the diversity and complexity of packaging services. As a result, we expect that we will need to continually introduce more advanced package designs in order to respond to competitive industry conditions and customer requirements. The requirement to develop, license and maintain advanced packaging capabilities and equipment could require significant research and development and capital expenditures in future years. Any failure by us to achieve advances in package design or to obtain access to advanced package designs developed by others could reduce our growth prospects and operating income. The intensity of competition in our industry could result in the loss of our customers, which could adversely affect our revenues and profits. We face substantial competition from a number of established independent packaging companies and with the internal capabilities of many of our largest customers. Each of our primary competitors has significant operational capacity, financial resources, research and development operations, and established relationships with many large semiconductor companies, which are current or potential customers of ours. Furthermore, our competitors may in the future capture our existing or potential customers through superior responsiveness, service quality, product design, technical competence or other factors, which we view as principal elements of competition in our industry. In addition, our primary customers may, in the future, shift more of their packaging and test service demand internally. As a result, we may have reduced revenues and profits. Our research and development efforts may not yield profitable and commercially viable services; thus, we may have significant short-term research and development expenses, which will not necessarily result in increases in revenue. Our research and development efforts may not yield commercially viable packages or test services. The qualification process for new customers is conducted in various 2 stages which may take one or more years to complete, and during each stage there is a substantial risk that we will have to abandon a potential package or test service which is no longer marketable and in which we have invested significant resources. In the event we are able to qualify new packages, a significant amount of time will have elapsed between our investment in new packages and the receipt of any related revenues. We could lose customers, and thus revenue, if we cannot maintain the quality of our services. The semiconductor packaging process is complex and involves a number of precise steps. Defective packaging can result from a number of factors, including the level of contaminants in the operational environment, human error, equipment malfunction, use of defective materials and plating services and inadequate sample testing. From time to time, we expect to experience lower than anticipated yields as a result of these factors, particularly in connection with any expansion of capacity or change in processing steps. In addition, our yield on new packaging could be lower during the period necessary for us to develop the requisite expertise and experience with these processes. Any failure by us to maintain high quality standards or acceptable yields, if significant and sustained, could result in the loss of customers, delays in shipments, increased costs and cancellation of orders. Our business may be adversely affected by the loss of, or reduced purchases by, Atmel, Fairchild, Intel, Intersil, LSI Logic, nVIDIA or any other large customer. Additionally, we may encounter difficulties in soliciting new customers. For the year ended December 31, 2001, sales to our top five customers in the aggregate accounted for approximately 70.6% of total net revenues. During this same period, our three largest customers Intersil, Intel and LSI Logic, respectively, produced 20.2%, 18.3% and 12.8% of our revenues. If any of our main customers were to purchase significantly less of our services in the future, these decreased levels of purchases could harm our operating results. Semiconductor packaging companies must pass a lengthy and rigorous qualification process that can take up to six months at a cost to the customer of approximately $250,000 to $300,000. If we fail to qualify packages with potential customers or customers with which we have recently become qualified do not use our services, then our customer base could become more concentrated with a limited number of customers accounting for a significant portion of our revenues. Moreover, we believe that once a semiconductor company has selected a particular packaging and test foundry company's services, the semiconductor company generally relies on that vendor's packages for specific applications and, to the extent possible, subsequent generations of that vendor's packages. Accordingly, it may be difficult to achieve significant sales from a particular or potential customer once it selects another vendor's packaging services. Our substantial indebtedness could adversely affect our financial health and make us vulnerable to adverse economic and industry conditions. As of December 31, 2001, our total indebtedness was $383.6 million. Our substantial indebtedness could have important consequences to you. For example, it could: . increase our vulnerability to general adverse economic and industry conditions by limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; . require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thus reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes; . place us at a competitive disadvantage relative to our competitors that have less debt; and 3 . limit, along with the financial and other restrictive covenants in our indebtedness, our ability to borrow additional funds. Furthermore, failing to comply with those covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on our ability to increase our revenues and profitability and meet our growth objectives. Despite our current levels of indebtedness, we still may be able to incur substantially more debt which could increase the risks created by our substantial indebtedness. We may be able to incur substantial additional indebtedness in the future. Our senior credit facility provides for revolving loans up to $50.0 million, including letters of credit. In addition, we have the ability to increase our revolving line of credit by $25.0 million without further consent from our existing lenders. Additionally, the indenture for the existing senior subordinated notes permits us to incur additional indebtedness if we meet a test measuring our cash flow relative to our required interest payments. This indenture also allows us to incur debt under our senior credit facility. The indenture for our convertible notes does not limit our ability to incur additional indebtedness. All of the borrowings under our senior credit facility are secured by all of our assets and those of our subsidiaries, except those of our Chinese operating subsidiary. The addition of new debt to our current debt levels could intensify the debt-related risks that we now face that are described above. The senior credit facility and the indenture governing our 12.75% senior subordinated notes impose limitations on how we conduct our business; as a result, we may not be able to pursue strategies that could be in the best interests of holders of our stock. The senior credit facility and the indenture governing our 12.75% senior subordinated notes contain restrictions on us that could increase our vulnerability to general adverse economic and industry conditions by limiting our flexibility in planning for and reacting to changes in our business and industry. Specifically, these restrictions limit our ability to: . incur additional debt; . pay dividends and make other distributions; . prepay subordinated debt; . make investments and other restricted payments; . enter into sale and leaseback transactions; . create liens; . sell assets; . enter into transactions with affiliates; and . consolidate or merge. Our senior credit facility contains financial covenants that require us to meet specified financial tests, including, without limitation, a minimum interest coverage ratio, a maximum leverage ratio, a minimum fixed charge coverage ratio, a maximum senior leverage ratio and a minimum consolidated adjusted EBITDA amount. As a result of these restrictions, we may not be able to pursue business strategies that could be in the best interest of the holders of our notes and stock. Our senior lenders have waived compliance with our financial covenants until December 31, 2002 and replaced those covenants with new covenants that apply for the year ended December 31, 2002, which we believe better reflect current conditions in the semi-conductor industry. The 4 amendment stipulated that we must raise at least $20.0 million of net proceeds of permitted junior capital and prepay the outstanding senior credit facilities on or prior to March 1, 2002 in an aggregate principal amount equal to the greater of (i) $20.0 million and (ii) 50% of those net proceeds. We fulfilled this requirement with our common stock offering in January 2002. The covenants waived for 2002 under the most recent bank amendment include: (1) the minimum interest coverage ratio of 1.6 to 1.0 through March 31, 2002, 1.75 to 1.0 through June 30, 2002 and 1.85 to 1.0 through December 31, 2002; (2) the maximum leverage ratio of 5.0 to 1.0 through June 30, 2002 and 4.5 to 1.0 through December 31, 2002; and (3) the maximum senior leverage ratio of 2.5 to 1.0 through December 31, 2002. These three covenants were waived under the current amendment and replaced for 2002 with (1) a minimum consolidated adjustable EBITDA amount of $30.0 million, $26.0 million, $32.0 million and $40.0 million for the twelve months ended March 31, June 30, September 30 and December 31, 2002, respectively, and (2) a new maximum capital expenditure amount of $30.0 million. Pursuant to a prior amendment, the minimum fixed charge coverage ratio of 1.05 to 1.0 was waived through December 31, 2002. At December 31, 2001, we were in compliance with all of our financial covenants, except the minimum fixed charge coverage ratio whose compliance was waived. In addition, at December 31, 2001, our interest coverage ratio was 1.31 to 1.0; our leverage ratio was 7.25 to 1.0 and our senior leverage ratio was 3.66 to 1.0. For the year ended December 31, 2001, our consolidated capital expenditures were approximately $46.4 million. While we were not required to maintain consolidated adjusted EBITDA for any periods ending on or prior to December 31, 2001, our consolidated adjusted EBITDA for the year ended December 31, 2001 was $46.0 million. If we fail to comply with the restrictions in the senior credit facility, a default may also occur under the indenture governing our 12.75% senior subordinated notes and any other financing agreements. This default may allow some creditors, if their respective agreements so provide, to accelerate payments owed on such debt as well as any other indebtedness as to which a cross-acceleration or cross-default provision applies. The creditors who may be entitled to accelerated payments in the event of a default are: (1) the holders of our 12.75% senior subordinated notes issued in the aggregate principal amount of $165.0 million, under an indenture dated July 29, 1999 by and among us, ChipPAC International Company Limited, and Firstar Bank, N.A. as trustee; and (2) the senior credit facility lenders, including Credit Suisse First Boston, New York branch, BankBoston N.A., State Street Bank and Trust Company, Balanced High-Yield Fund II Limited, CIBC Inc., First Source Financial LLP, Heller Financial, Inc., The First National Bank of Chicago and IBM Credit Corporation, under our senior credit facility, dated as of August 5, 1999 by and among the us, ChipPAC International Company Limited, and Credit Suisse First Boston, New York branch as the administrative agent, collateral agent and sole lead arranger for the senior facility lenders. As of December 31, 2001, the aggregate principal amount of the senior credit facility was $275.0 million of which approximately $168.6 million was outstanding. In addition, our lenders may be able to terminate any commitments they had made to supply us with further funds. Economic crisis in Asia where most of our suppliers are located could prevent us from securing adequate supplies of materials, which could, in turn, prevent us from meeting the requirements of our customers and result in a decrease in our revenues. Most of our materials suppliers are located in Asia. Historically, over half of our substrate costs were incurred from the purchase of materials from Japanese suppliers. In the future, we expect that a growing portion of these materials will be supplied by sources in South Korea and Taiwan. Several countries in this region have experienced currency devaluation and/or difficulties in financing short-term obligations. We cannot assure you that the effect of an economic crisis on our suppliers will not impact operations, or that the effect on our customers in that region will not adversely affect both the demand for our services and the collectibility of receivables. The failure of our vendors to supply sufficient quantities of materials on a timely 5 basis could prevent us from fulfilling our customers' orders. In addition, we may not be able to pass on any unexpected increase in the cost of these materials to our customers. We obtain materials to fill orders for our packaging and test services directly from vendors. To maintain competitive packaging operations, we must obtain from our vendors, in a timely manner, sufficient quantities of acceptable materials at expected prices. We source most of our materials, including critical materials like laminate substrates, lead frames, mold compounds and gold wires, from a limited group of suppliers. We purchase all of our materials on a purchase order basis and have no long-term contracts with any suppliers. From time to time, vendors have extended lead times or limited the supply of required materials to us because of vendor capacity constraints and, consequently, we have experienced difficulty in obtaining acceptable materials on a timely basis. Our business and results could be negatively impacted if our ability to obtain sufficient quantities of materials and other supplies in a timely manner were substantially diminished or if there were significant increases in the cost of materials that we could not pass on to our customers. If we are unable to obtain capital equipment in a timely manner, we may be unable to meet the increased demands of our customers which could result in a decrease in our revenues. Our facilities currently have sufficient packaging and test services capacity to meet the current and expected demands of our customers. Nonetheless, in the event there are significant increases in overall semiconductor demand or demand for some of our products and services, we may not be able to meet those increased demands of our customers. Moreover, because the semiconductor packaging and test services business requires investment in expensive capital equipment and is characterized, from time to time, by intense demand, limited supply and long delivery cycles, we may not be able to readily increase our operating capacity. This would lead to a loss of sales of our packaging and test services, could ultimately lead to a loss in market share and have a negative impact on our results of operations. We depend upon intellectual property and license critical technology from Hynix Semiconductor, Motorola, Inc., Tessera, Inc., LSI Logic and Intersil. To the extent these licenses are not perpetual and irrevocable, our net revenues could be materially adversely affected if our rights under these licenses expire or are terminated. We seek to protect our proprietary information and know-how through the use of trade secrets, confidentiality agreements and other security measures. We may not obtain patent protection for the patent applications that we file, or if we are granted patents, those patents may not offer meaningful protection. Additionally, we cannot assure you that our competitors will not develop, patent or gain access to similar know-how and technology, or reverse engineer our packaging services, or that any confidentiality agreements upon which we rely to protect our trade secrets and other proprietary information will be adequate to protect our proprietary technology. Any patents and utility model, design right and computer program right registrations obtained relating to technology that we developed prior to our recapitalization are owned by Hynix Semiconductor Inc., formerly Hyundai Electronics Inc. In connection with our recapitalization, we entered into a patent and technology license agreement by which Hynix Semiconductor granted us license to use specific intellectual property rights in our semiconductor packaging and test activities. We expect to seek patents and utility model, design right and computer program right registrations, as applicable, on new packaging process and package design technologies that we develop as a means of protecting technology and market position. We have a non-exclusive sublicense from Hynix Semiconductor to use patented BGA technologies owned by Motorola, which expires on December 31, 2002. Motorola licenses these patents to others, including our competitors. After giving pro forma effect to the acquisition of the Malaysian business as if it had occurred at the beginning of 2000, these BGA technologies contributed 41.1% of our net revenues in 2000, 6 We have a worldwide, royalty-bearing, non-exclusive license under specified Tessera patents, technical information and trademarks relating to Tessera's proprietary IC packages. This license will expire sometime after February 2018. We also have two separate license agreements with LSI Logic under which we have worldwide, royalty-bearing, non-exclusive licenses to use LSI packaging technology and technical information to manufacture, use and sell flip-chip semiconductor devices having at least 200 solder balls and semiconductor device assemblies having an overall height of less than 1.2 millimeters, respectively. The LSI Logic license relating to flip-chip semiconductor devices becomes perpetual and irrevocable upon our payment of fees or January 1, 2004, whichever occurs first. The other LSI Logic license is perpetual but may be terminated by LSI Logic in the event of our uncured breach or bankruptcy. In addition, we have a worldwide, royalty-free, non-exclusive license under Intersil patents, copyrights and technical information which are used in or related to the operation of the Malaysian business. This Intersil license is perpetual and irrevocable. Any intellectual property rights in the bonding diagrams, test programs, maskworks and test boards uniquely related to the Intersil products for which we provide packaging and test services are licensed to us only for use in providing those services. To the extent these licenses are not perpetual and irrevocable, we may be unable to utilize the technologies under these licenses if they are not extended or otherwise renewed or if any of these licenses are terminated by the licensor due to our uncured breach or bankruptcy. Alternatively, if we are able to renew these arrangements, we cannot assure you that they will be on the same terms as currently exist. Any failure to extend or renew these license arrangements could cause us to incur substantial liabilities and to suspend the packaging services and processes that utilized these technologies. The loss of our skilled technical, marketing and sales personnel or our key executive officers could have a material adverse effect on our research and development, marketing and sales efforts. Our competitiveness will depend in large part upon whether we can attract and retain skilled technical, marketing and sales personnel and can retain members of our executive team. Competition for skilled personnel is intense, and we may not be successful in attracting and retaining the technical personnel or executive managers we require to develop new and enhanced packaging and test services and to continue to grow and operate profitably. If we cannot attract or retain skilled personnel, we may not be able to operate successfully in the future. If we encounter future labor problems, we may fail to deliver our products in a timely manner which could adversely affect our revenues and profitability. Our employees at our Ichon, South Korea facility are represented by ChipPAC Korea Labor Union and are covered by collective bargaining and wage agreements. The collective bargaining agreement, which covers basic union activities, working conditions and welfare programs, among other things, is effective to May 1, 2003 and the wage agreement is effective to May 1, 2002. As of December 31, 2001, approximately 78% of our employees were represented by the ChipPAC Korea Labor Union. In addition, one of our Chinese subsidiaries experienced labor protests and a two-day work stoppage in July 1998 in connection with proposed work force reductions. We cannot assure you that issues with the labor union or other employees will be resolved favorably for us in the future, that we will not experience significant work stoppages in future years or that we will not record significant charges related to those work stoppages. In addition, potential efficiency enhancement efforts, including personnel reductions, following our recent acquisition of the Malaysian business may create the risk of labor problems in Malaysia or at other facilities. New laws and regulations, currency devaluation and political instability in foreign countries, particularly in China, Malaysia and South Korea could make it more 7 difficult for us to operate successfully. For the years ended December 31, 2001, 2000 and 1999, we generated approximately 8.1%, 16.7% and 11.3% of total revenues, respectively, from international markets, primarily from customers in Southeast Asia and Europe. In addition, all of the facilities currently used to provide our packaging services are located in China, Malaysia and South Korea. Moreover, many of our customers' operations are located in countries outside of the United States. We cannot determine if our future operations and earnings will be affected by new laws, new regulations, a volatile political climate, changes in or new interpretations of existing laws or regulations or other consequences of doing business outside the U.S., particularly in China, Malaysia and South Korea. If future operations are negatively affected by these changes, our sales or profits may suffer. Fluctuations in the exchange rate of the U.S. dollar and foreign currencies could have a material adverse effect on our financial performance and profitability. A portion of our costs are denominated in foreign currencies, like the South Korean Won, the Chinese Renminbi or RMB and the Malaysian Ringgit. As a result, changes in the exchange rates of these currencies or any other applicable currencies to the U.S. dollar will affect our costs of goods sold and operating margins and could result in exchange losses. We cannot fully predict the impact of future exchange rate fluctuations on our profitability. From time to time, we may engage in exchange rate hedging activities in an effort to mitigate the impact of exchange rate fluctuations. However, we cannot assure you that any hedging technique we may implement will be effective. If it is not effective, we may experience reduced operating margins. We could suffer adverse tax and other financial consequences if U.S. or foreign taxing authorities do not agree with our interpretation of applicable tax laws. Our corporate structure is based, in part, on assumptions about the various tax laws, including withholding tax, and other relevant laws of applicable non-U.S. jurisdictions. We cannot assure you that foreign taxing authorities will agree with our interpretations or that they will reach the same conclusions. Our interpretations are not binding on any taxing authority and, if these foreign jurisdictions were to change or to modify the relevant laws, we could suffer adverse tax and other financial consequences or have the anticipated benefits of our corporate structure materially impaired. Because the Malaysian business previously operated as a subsidiary of Intersil, our future financial results may be significantly different from those experienced historically. Prior to our acquisition of our Malaysian business in 2000, it was operated as a subsidiary of Intersil. All the historical revenues of the Malaysian business represent intercompany sales to Intersil on terms determined by Intersil. Although we expect to retain this business pursuant to a five-year supply agreement with Intersil, volume, product mix and pricing may change in the future, and we cannot assure you that Intersil will perform under our supply agreement. We entered into supply contracts with Intersil in connection with our acquisition of our Malaysian business and with Fairchild Semiconductor following Fairchild's acquisition of Intersil's discrete power business, and any decrease in the purchase requirements of Intersil or Fairchild or the inability of Intersil or Fairchild to meet its contractual obligations could substantially reduce the financial performance of our Malaysian subsidiary. Historically, the Malaysian business generated all of its revenues from the sale of products and services to affiliated Intersil companies. The revenue of the Malaysian business for the first six months of 2000 prior to our acquisition of it and for all of 1999 was $41.9 million and $101.9 million, respectively. As a result of our acquisition of the Malaysian business, we have numerous arrangements with Intersil, including arrangements relating to packaging and test services as a vendor to 8 affiliated Intersil companies and other services. Any material adverse change in the purchase requirements of Intersil or in its ability to fulfill its other contractual obligations could have a material adverse effect on our Malaysian subsidiary. Moreover, we may be unable to sell any products and services to affiliated Intersil companies beyond the term of our five-year supply agreement with Intersil. In connection with Fairchild Semiconductor's acquisition of Intersil's discrete power business, we entered into an assignment agreement that assigned Intersil's portion of the supply agreement relating to this business to Fairchild. We have also entered into a three-year IT services agreement with Intersil under which the Malaysian business will continue to obtain a number of these services from Intersil. We cannot assure you that Fairchild will perform under the supply agreement or that Intersil will perform under the supply and services agreements or that upon termination of these agreements we will be able to obtain similar services on comparable terms. We may not be able to consummate future acquisitions, and consequences of those acquisitions which we do complete may adversely affect us. We plan to continue to pursue additional acquisitions of related businesses. The expense incurred in consummating the future acquisition of related businesses, or our failure to integrate those businesses successfully into our existing business, could result in our incurring unanticipated expenses and losses. We plan to continue to pursue additional acquisitions of related businesses in the future. We may be unable to identify or finance additional acquisitions or realize any anticipated benefits from those acquisitions. Should we successfully acquire another business, the process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of our existing operations. Possible future acquisitions could result in the incurrence of contingent liabilities and amortization expenses related to goodwill and other intangible assets, all of which could have a material adverse effect on our financial condition and operating results. In addition, we may finance future acquisitions with additional indebtedness. We have a substantial amount of outstanding indebtedness and will, subject to compliance with our debt instruments, have the ability to incur additional indebtedness. We will be required to generate cash flow from operations to service that indebtedness and there can be no assurance that we will generate sufficient cash flow to service that indebtedness. We may be required to refinance our indebtedness upon its maturity, and we cannot assure you that we will be able to refinance our indebtedness at all or on terms acceptable to us. Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and other acts of violence or war may affect the markets on which our securities trade, the markets in which we operate, our operations and our profitability. Terrorist attacks may negatively affect our operations and your investment. There can be no assurance that there will not be further terrorist attacks against the United States or United States businesses. These attacks or armed conflicts may directly impact our physical facilities or those of our suppliers or customers. Our current facilities include administrative, sales, and R&D facilities in the United States and manufacturing facilities in China, Malaysia and South Korea. Furthermore, these attacks may make travel and the transportation of our supplies and products more difficult and more expensive and ultimately affect the sales of our products in the United States and overseas. Also as a result of terrorism, the United States may enter into an armed conflict which could have a further impact on our domestic and international sales, our supply chain, our production capability and our ability to deliver product to our customers. Political and economic instability in some regions of the world may also result and could negatively impact our business. The consequences of any of these armed conflicts 9 are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business or your investment. A limited number of persons indirectly control us and may exercise their control in a manner adverse to your interests. At March 1, 2002, Citicorp Venture Capital, Ltd. and its affiliates owned or had the right to acquire 23,849,397 shares or approximately 29.4% of our outstanding Class A common stock. At March 1, 2002, funds affiliated with Bain Capital, Inc. owned 21,387,396 shares or approximately 26.4% of our outstanding Class A common stock. By virtue of this stock ownership, these entities collectively have the power to direct our affairs and will be able to determine the outcome of all matters required to be submitted to stockholders for approval, including the election of a majority of our directors, any merger, consolidation or sale of all or substantially all of our assets and amendment of our certificate of incorporation. Because a limited number of persons control us, transactions could be difficult or impossible to complete without the support of those persons. It is possible that these persons will exercise control over us in a manner adverse to your interests. If our relationship with Hynix Semiconductor, our previous owner, deteriorates, our business could be adversely affected. Our facilities in Ichon, South Korea occupy a portion of a building located on property owned by Hynix Semiconductor, a current stockholder and former majority owner. In addition, Hynix Semiconductor is one of our current customers. An unfavorable change in our relations with Hynix Semiconductor could adversely effect services we receive from them at this facility and the revenue we derive from the products and services we provide to them. Environmental, health and safety laws could require us to incur capital and operational costs to maintain compliance and could impose liability to remedy the effects of hazardous substance contamination. We are subject to liabilities and compliance obligations arising under environmental, health and safety laws. These laws impose various controls on the quality of our air and water discharges, on the storage, handling, discharge and disposal of chemicals the company uses, and on employee exposure to hazardous substances in the workplace. Environmental, health and safety laws could require us to incur capital and operational costs to maintain compliance and could impose liability to remedy the effects of hazardous substance contamination. We cannot assure you that applicable environmental, health and safety laws will not in the future impose the need for additional capital equipment or other process requirements upon the company, curtail its operations, or restrict its ability to expand its operations. The adoption of new environmental, health and safety laws, the failure to comply with new or existing laws, or issues relating to hazardous substance contamination could subject the company to future material liability. Risks Relating to Our Class A Common Stock Our stock price has fluctuated significantly in the past, and the market price of our Class A common stock may be lower than you expect. Since our initial public offering on August 8, 2000, the closing price of our Class A common stock has fluctuated significantly, ranging from a low of $1.88 to a high of $18.50 per share. Fluctuations in our stock price could continue. Among the factors that could affect our stock price are: . quarterly variations in our operating results; . rating changes by research analysts; . strategic actions by us or our competitors, such as acquisitions; . general market conditions; and 10 . general economic factors unrelated to our performance. The stock markets in general, and the markets for technology companies in particular, have experienced a high degree of volatility not necessarily related to the operating performance of particular companies. We cannot provide assurances as to our stock price. Some of our long-time stockholders have the right to require us to register the public sale of their shares; all of our total outstanding shares of Class A common stock may be sold into the market; future sales of those shares could depress the market price of our Class A common stock. The public market for our Class A common stock includes 11,500,000 shares of Class A common stock that we sold in our initial public offering and an additional 11,445,600 shares of Class A common stock that we sold to the public in January 2002. At the time of our initial public offering, there were 55,631,718 additional shares of our Class A common stock outstanding. Those people and entities who were our stockholders prior to our initial public offering are able to sell their shares in the public market, subject to legal restrictions on transfer. Some of our stockholders prior to our initial public offering are parties to agreements with us that provide for demand registration rights to cause us to register under the Securities Act of 1933, as amended, or the Securities Act, all or part of their shares of our Class A common stock, as well as piggyback registration rights. Currently, approximately 46,463,489 shares of our Class A common stock have restrictions on resale and are subject to these registration rights. We believe that all of the other shares of our Class A common stock are freely tradable. Registration of the sale of these restricted shares of our Class A common stock would permit their sale into the market immediately. If our stockholders sell a large number of shares, the market price of our Class A common stock could decline, as these sales may be viewed by the public as an indication of an upcoming or recently occurring shortfall in the financial performance of our company. Moreover, the perception in the public market that these stockholders might sell shares of our Class A common stock could depress the market price of the Class A common stock. As of March 13, 2002, we had 81,031,705 shares of our Class A common stock outstanding. All of these shares are freely tradeable without restriction under the Securities Act, except for any shares which may be held or acquired by an affiliate of our company, as that term is defined in Rule 144 promulgated under the Securities Act. We believe that affiliates hold approximately 46,416,214 shares of common stock, and that those shares could only be sold over the next 12 months in accordance with the volume and manner of sale limitations set forth in Rule 144. Provisions of our charter documents could discourage potential acquisition proposals and could delay, deter or prevent a change in control. Provisions of our certificate of incorporation and by-laws may inhibit changes in control of our company not approved by our board of directors and would limit the circumstances in which a premium may be paid for our Class A common stock in proposed transactions, or a proxy contest for control of the board may be initiated. These provisions provide for: . a prohibition on stockholder action through written consents; . a requirement that special meetings of stockholders be called only by our chief executive officer or the board of directors; . advance notice requirements for stockholder proposals and nominations; . limitations on the ability of stockholders to amend, alter or repeal the by-laws; and . the authority of the board to issue, without stockholder approval, 11 preferred stock with terms as the board may determine. Your right to receive payments on the Class A common stock is junior to the company's existing and, possibly future, senior and subordinated indebtedness. It is possible, therefore, that you may receive no compensation of any kind relating to the Class A common stock if there is a bankruptcy, liquidation or similar proceeding affecting us. The Class A common stock ranks behind all of our existing indebtedness, including our guarantees of our subsidiary's obligations under the senior credit facility and our subsidiary's 12.75% senior subordinated notes and our obligations under our 8% convertible subordinated notes. The Class A common stock also ranks behind all of our future borrowings, except any future indebtedness that expressly provides that it ranks with, or subordinated in right of payment to, the Class A common stock. As a result, upon any distribution to our creditors, in a bankruptcy, liquidation or reorganization or similar proceeding relating to us or our property, we will have to pay the holders of debt senior to the Class A common stock in full before we can make any payment on the Class A common stock. Moreover, the Class A common stock will be structurally subordinated to all liabilities, including trade payables, of our subsidiaries and any subsidiaries upon their liquidation or reorganization, and the rights of the holders of the Class A common stock to share in those assets, would be subordinate to the claims of the subsidiaries' creditors. In addition, all payments on the Class A common stock will be blocked in the event of a payment default on our senior and subordinated debt, including borrowings under the senior credit facility, and may be blocked for specified periods in the event of non-payment defaults on certain senior debt. Risks Relating to Our 8% Convertible Subordinated Notes Your right to receive payments on the 8% convertible subordinated notes is junior to the company's existing and, possibly future, senior indebtedness. It is possible, therefore, that you may receive no compensation of any kind relating to the notes if there is a bankruptcy, liquidation or similar proceeding affecting us. We may not have sufficient funds to satisfy our obligations relating to the 8% convertible subordinated notes. The 8% convertible subordinated notes rank behind all of our existing indebtedness, including our guarantees of our subsidiary's obligations under the senior credit facility and our subsidiary's 12.75% senior subordinated notes. The 8% convertible subordinated notes will also rank behind all of our future borrowings, except any future indebtedness that expressly provides that it ranks with, or subordinated in right of payment to, the convertible subordinated notes. In total as of December 31, 2001, the amount of our indebtedness which constitutes senior indebtedness was $333.6 million. As a result, upon any distribution to our creditors, in a bankruptcy, liquidation or reorganization or similar proceeding relating to us or our property, we will have to pay the holders of debt senior to the 8% convertible subordinated notes in full before we can make any payment on the 8% convertible subordinated notes. Moreover, the 8% convertible subordinated notes will be structurally subordinated to all liabilities, including trade payables, of our subsidiaries and any subsidiaries upon their liquidation or reorganization, and the rights of the holders of the convertible subordinated notes to share in those assets, would be subordinate to the claims of the subsidiaries' creditors. In addition, all payments on the 8% convertible subordinated notes will be blocked in the event of a payment default on our senior debt, including borrowings under the senior credit facility, and may be blocked for specified periods in the event of non-payment defaults on certain senior debt. As a holder of debt securities, you would typically have equal rights to your ratable share, along with all of our suppliers and vendors to which we owe money, who are commonly referred to as trade creditors, and other holders of debt of the same class as the notes, of any assets remaining after we have paid off all of the debt senior to the notes. However, the indenture governing the 8% convertible subordinated notes requires that amounts otherwise payable to holders of the convertible 12 subordinated notes in a bankruptcy, liquidation or similar proceeding be paid to holders of debt senior to the convertible subordinated notes instead. Consequently, holders of the 8% convertible subordinated notes may receive less, ratably, than holders of trade payables or other debt of the same class in this type of proceeding. We are a holding company and conduct all of our operations through our subsidiaries, which may affect our ability to make payments on the 8% convertible subordinated notes. All of our manufacturing services are conducted through our subsidiaries. As a result, our cash flow and our ability to service our debt, including the 8% convertible subordinated notes, depend upon the earnings of our subsidiaries. In addition, we depend on the distribution of earnings, loans or other payments by our subsidiaries to us. Our subsidiaries are separate and distinct legal entities. Our subsidiaries have no obligation to pay any amounts due on the 8% convertible subordinated notes. Our subsidiaries are not required to provide us with funds for our payment obligations, whether by dividends, distributions, loans or other payments. In addition, any payment of dividends, distributions, loans or advances by our subsidiaries to us could be subject to statutory or contractual restrictions. Payments to us by our subsidiaries will also be contingent upon our subsidiaries' earnings and business considerations. We may not have the ability to raise the funds necessary to finance the change in control offer required by the indenture governing the 8% convertible subordinated notes. If the company undergoes a change in control (as defined in the indenture governing the 8% convertible subordinated notes) we may need to refinance large amounts of our debt, including our 12.75% senior subordinated notes, these 8% convertible subordinated notes and borrowings under the senior revolving credit facility. If a change in control occurs, we must offer to buy back the 8% convertible subordinated notes for a price equal to 100.0% of the principal amount of the 8% convertible subordinated notes, plus any accrued and unpaid interest. We cannot assure you that there will be sufficient funds available for us to make any required repurchases of the 8% convertible subordinated notes upon a change in control. In addition, our senior revolving credit facility will prohibit us from repurchasing the 8% convertible subordinated notes until we first repay the senior revolving credit facility in full and the indenture governing our 12.75% senior subordinated notes requires us to meet financial tests before prepaying subordinated debt like the 8% convertible subordinated notes. If we fail to repurchase the 8% convertible subordinated notes in that circumstance, we will go into default under the indenture governing the 8% convertible subordinated notes and by virtue of the cross-default provisions contained in the notes, the senior revolving credit facility and the indenture governing our 12.75% senior subordinated notes. A change in control for purposes of the indenture governing the 8% convertible subordinated notes may also constitute a change in control under the indenture governing our 12.75% senior subordinated notes, which would require that we offer to buy back the 12.75% senior subordinated notes prior to these notes. Any future debt which we incur may also contain restrictions on repayment upon a change in control. If any change in control occurs, we cannot assure you that we will have sufficient funds to satisfy all of the company's debt obligations. These buyback requirements may also delay or make it harder for others to effect a change in control. However, certain other corporate events, such as leveraged recapitalizations that would increase our level of indebtedness, would not constitute a change in control under the indenture governing the 8% convertible subordinated notes. Federal and state laws allow courts, under specific circumstances, to void debts and require holders of debt securities to return payments received from debtors. All of the net proceeds from the initial private placement of the 8% convertible subordinated notes were used to repay our existing senior credit facility. If a bankruptcy proceeding or a lawsuit is initiated by the company's unpaid creditors, the debt which we incurred to repay our existing credit facility, including the notes, may 13 be reviewed under federal bankruptcy laws and comparable provisions of state fraudulent transfer laws. Under these laws, the debt of the company could be voided, or claims in respect of the debt could be subordinated to all other debt if, among other things, the company: . received less than reasonably equivalent value or fair consideration for the incurrence of such debt; . was insolvent or rendered insolvent by reason of such incurrence; . was engaged in a business or transaction for which the remaining assets of the company constituted unreasonably small capital; or . intended to incur, or believed that the company would incur, debts beyond our ability to pay such debts as they mature. In addition, you may be required to return to fund for the benefit of creditors, any payments received from us in respect of the 8% convertible subordinated notes. The measures of insolvency will vary depending upon the fraudulent transfer law applied in any proceeding to determine whether such a transfer has occurred. Generally, however, a debtor would be considered insolvent if: . the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all of its assets; . the present fair saleable value of its assets were less than the amount that would be required to pay its probable liability on existing debts, including contingent liabilities, as they become absolute and mature; or . it could not pay its debts as they become due. On the basis of historical financial information, recent operating history and other factors, we believe that we are not insolvent, do not have unreasonably small capital for the business in which we are engaged and have not incurred debts beyond our ability to pay such obligations as they mature. We cannot assure you, however, as to what standard a court would apply in making such determination, or that a court would agree with our conclusion in this regard. We cannot assure you that an active trading market will develop for the 8% convertible subordinated notes. There has been no public market for the 8% convertible subordinated notes. In addition, both the liquidity and the market price quoted for these notes may be adversely affected by changes in the price of our Class A common stock, changes in the overall market for convertible securities and by changes in our financial performance or prospects, or in the prospects for companies in our industry generally. In particular, the price of our 8% convertible subordinated notes may fluctuate with our stock price since the notes are convertible into stock. As a result, we cannot assure you that an active or stable trading market will develop or continue for these 8% convertible subordinated notes. We also cannot guarantee that the 8% convertible subordinated notes will trade in the same or like manner as our 12.75% senior subordinated notes. Risks Relating to Our 12.75% Senior Subordinated Notes ChipPAC International Company Limited does not have an independent source of income from which to satisfy obligations of the 12.75% senior subordinated notes. ChipPAC International Company Limited or ChipPAC International will rely on intercompany loans through its direct and indirect subsidiaries to satisfy obligations of its indebtedness; as a result, if these subsidiaries are not able to make payments on these intercompany loans, we may not be able to pay our noteholders interest on the 14 12.75% senior subordinated notes when due. The only source of cash for ChipPAC International to pay principal and interest on the 12.75% senior subordinated notes will be through payments of interest and principal on intercompany notes, capital contributions from the parent company or dividends or distributions from ChipPAC International's subsidiaries, which dividends or distributions would be funded through payments on intercompany notes. We will rely principally on funds generated by ChipPAC International's operating subsidiaries to fund payments on the notes and other indebtedness. If these subsidiaries are unable to make payments on their intercompany loans, we may not be able to satisfy obligations under our debt instruments, including payment of interest on the senior revolving credit facility and these 12.75% senior subordinated notes. Our ability to pay our obligations under the 12.75% senior subordinated notes may be reduced because ChipPAC International's Chinese operating subsidiaries, which hold 27.6% of our consolidated assets and generated 17.1% of our consolidated revenues for the year ended December 31, 2001, are not guarantors of the notes. Our Chinese subsidiaries are not guarantors of the notes. For the year ended December 31, 2001, the total revenues for our Chinese subsidiaries were $58.9 million, representing approximately 17.1% of our consolidated revenues. The combined assets for our Chinese subsidiaries at December 31, 2001 were approximately $118.8 million, representing approximately 27.6% of our consolidated assets. Claims of creditors of our Chinese operating subsidiaries, including trade creditors, secured creditors and creditors holding indebtedness or guaranties issued by these subsidiaries, will generally have priority on the assets and earnings of these subsidiaries, over the claims of creditors of our company, including holders of our 12.75% senior subordinated notes, even if the obligations of our Chinese operating subsidiaries do not constitute senior indebtedness. Since the company's Chinese subsidiaries will not guarantee the 12.75% senior subordinated notes, holders of the notes will have to rely solely on dividends or distributions from the company's Korean, Malaysian and British Virgin Islands subsidiaries to satisfy their respective obligations under the notes should the company's Chinese subsidiaries be unable to make dividends or distributions. We may not have the ability to raise the funds necessary to finance the change of control offer required by the indenture governing the 12.75% senior subordinated notes. If the company undergoes a change of control (as defined in the indenture governing the 12.75% senior subordinated notes) we may need to refinance large amounts of our debt, including the 12.75% senior subordinated notes and borrowings under the senior revolving credit facility. If a change of control occurs, we must offer to buy back the 12.75% senior subordinated notes for a price equal to 100.0% of the principal amount of the notes, plus any accrued and unpaid interest. We cannot assure you that there will be sufficient funds available for us to make any required repurchases of the 12.75% senior subordinated notes upon a change of control. In addition, our senior revolving credit facility will prohibit us from repurchasing the notes until we first repay the senior revolving credit facility in full. If we fail to repurchase the 12.75% senior subordinated notes in that circumstance, we will go into default under both the indenture governing the notes and the senior revolving credit facility. Any future debt which we incur may also contain restrictions on repayment upon a change of control. If any change of control occurs, we cannot assure you that we will have sufficient funds to satisfy all of the company's debt obligations. These buyback requirements may also delay or make it harder for others to effect a change of control. However, certain other corporate events, such as leveraged recapitalizations that would increase our level of indebtedness, would not constitute a change of control under the indenture governing the notes. We cannot assure you that an active trading market will develop or continue for the 12.75% senior subordinated notes. 15 The 12.75% senior subordinated notes are publicly traded but do not necessarily trade actively. In addition, both the liquidity and the market price quoted for these notes may be adversely affected by changes in the price of our Class A common stock, changes in the overall market for convertible securities and by changes in our financial performance or prospects, or in the prospects for companies in our industry generally. As a result, we cannot assure you that an active or stable trading market will develop or continue for these 12.75% senior subordinated notes. We also cannot guarantee that the 12.75% senior subordinated notes will trade in the same or like manner as our 8% convertible subordinated notes. 16 -----END PRIVACY-ENHANCED MESSAGE-----